Page nos.

1. Conceptual Framework of Corporate Governance (50 MARKS)

Meaning and Definitions of Corporate Governance
Advantages of Corporate Governance
Need for Corporate Governance
Elements / Scope of Good Corporate Governance
Corporate Governance Theories
Management VS Ownership
Majority VS Minority
Stages of development of Corporate Governance in USA
Development of Corporate Governance in UK
U.S. Securities and Exchange Commission
Sarbanes-Oxley Act of 2002
2018 UK Corporate Governance Code (2018 Code)
Corporate Governance Principles and Recommendations, Australia -2019.
Code of Corporate Governance, Singapore - 2018
King IV Report on Corporate Governance, South Africa – 2016
OECD Principles of Corporate Governance
Kautilya’s fourfold duty of a king
Corporate Governance – Contemporary Developments in India
2. Legislative Framework of Corporate Governance in India
Principles for Periodic Disclosures and for Corporate Governance
Corporate Governance of Banking and Financial Institutions
Ganguly Committee Recommendations on Corporate Governance in Banks
Recommendations applicable only to public sector bank
Recommendations applicable only to private sector bank
Basel Committee on Corporate Governance
Guidelines on Corporate Governance for NBFCs
Corporate Governance Guidelines for Insurance Companies
Stewardship Code for Insurers in India
Corporate Governance in Public Sector Enterprises
Salient features of Guidelines on Corporate Governance for Central Public
Sector Enterprises 2010
Guidelines on Corporate Social Responsibility and Sustainability for Central
Public Sector Enterprises
3. Board Effectiveness
Role of the Board of directors
Types of Directors under Companies Act 2013
Composition and Structure of Board
Selection and Appointment of Directors
Duties of the Directors
Powers of the Board
Independent Directors for Better Board Effectiveness
Appointment of Lead Independent Director
Separation of role of Chairman and Chief Executive Officer
Succession Planning
Directors Training, Development and Familiarization
Performance Evaluation of the Board and management
Board Effectiveness and the Role of the Company Secretary
4. Board Processes through Secretarial Standards
Convening a Meeting
Notice
 Agenda
Frequency of Meetings
Quorum
Attendence Register
Resolution by Circulation
Minutes
Finalisation of Minutes
Signing of Minutes
Preservation of Minutes
Disclosures
5. Board Committees
Committee Management
Selection of Committee Members
Mandatory Committees of the Board
Audit Committee
Nomination and Remuneration Committee
Stakeholders Relationship Committee
Corporate Social Responsibility Committee
Risk Management Committee
Other Committees
6. Corporate Policies and Disclosures
Importance of corporate policies
Policies under the Companies Act 2013
Policies under the SEBI (LODR), Regulations, 2015
Policies under other laws and voluntary policies
Disclosure and Transparency requirements
Section 134(5),the Directors’ Responsibility Statement

Disclosures under other Sections of Companies Act, 2013

Under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011
Under SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015
Under SEBI (Prohibition Of Insider Trading) Regulations, 2015
7. Accounting and Audit related issues, RPTs and Vigil Mechanism
Improving Auditors’s Effectiveness
To maintain independence of the auditors the following cannot be appointed
Auditors (Section 141)
Auditor’s Remuneration and Non-Audit Services
Reporting of Fraud by Auditors
Mandatory Rotation Of Auditors
Internal Audit
Secretarial Audit
Constitution of National Financial Reporting Authority (NFRA)
Functions and duties of the Authority
Powers Of NFRA
Related Party Transaction
Identification of Related Parties
8. Corporate Governance and Shareholders Rights
Promotor
Role and Liabilities of Promoters
Majority And Minority Shareholders
Protection of Rights of Shareholders/Investors In India
Investor Education & Protection Fund
 Investor Associations
Protection of Rights of Minority Shareholders
Class action suit
Tools Used by Institutional Investors
UK Stewardship Code
Principles for Responsible Investment (PRI)
Code for Responsible Investing in South Africa (CRISA)
California Public Employees’ Retirement System
Dealing with Institutional Investors
Role of Proxy Advisory Firms
Governance of Group Entities/ Subsidiaries
Corporate Governance in Family Owned Enterprises
9. CORPORATE GOVERNANCE AND OTHER STAKEHOLDERS
Definition and Evolution of Stakeholder Theory
Recognition of Stakeholder Concept in Law (UK & India)
Stakeholder Engagement
Stakeholder Analysis
Better Stakeholder Engagement Ensures Good Governance
Types of Stakeholders
The Caux Round Table
The Clarkson Principles of Stakeholder Management
Governance Paradigm and Various Stakeholders
10. GOVERNANCE AND COMPLIANCE RISK
Compliance Risk
Consequences/ Risks of Non-Compliance
Compliance Risk Management
Steps in Compliance Risk Management
Compliance Risk Mitigation
Essentials of a Successful Compliance-Risk Management Program
New Developments- Governance and Risk Compliance (GRC)
11. CORPORATE GOVERNANCE FORUMS
Institute of Company Secretaries of India (ICSI)
National Foundation for Corporate Governance (NFCG)
Organization for Economic Co-Operation and Development (OECD)
Institute of Directors (IoD), Uk
Commonwealth Association of Corporate Governance (CACG)
International Corporate Governance Network (ICGN)
European Corporate Governance Institute (ECGI)
Conference Board
Asian Corporate Governance Association (ACGA)
Corporate Secretaries International Association (CSIA)
Parameters of Better Governed Companies
12. RISK MANAGEMENT (20 MARKS)
Risk
Classification of Risks
Risk Management
Advantages of Risk Management
Steps in Risk Management Process
Risk Mitigation Strategy
Fraud Risk Management
Reputation Risk Management
Responsibility of Risk Management
Role of Company Secretary in Risk Management
 Risk Governance
Enterprise Risk Management – Integrated Framework (2004)
ISO 31000: International Standard for Risk Management
Risk Management and Internal Controls
Risk Matrix
13. COMPLIANCE MANAGEMENT (20 MARKS)
Compliance
Significance of Compliance
Corporate Compliance Management
Significance of Corporate Compliance Management
Essentials of an Effective Compliance Program
Challenges for Effective Corporate Compliance Management
Process of Corporate Compliance Management
Internal Compliance Reporting Mechanism (ICRM)
Scope of Corporate Compliance Management
Use of Technology for Compliance Management
Compliance Solutions
Compliance with Spirit of Law (Ethics)
Role of Company Secretaries
14. INTERNAL CONTROL
Nature of Internal Control
Classification of Internal Control
Elements of Internal Control
Components of Internal Control
Limitations of Internal Control
Techniques of Internal Control System
Internal Check
Internal Audit
Steps for Internal Control
COSO’S Internal Control Framework
Role and Responsibilities with regard to Internal Control
15. REPORTING
Financial Reporting
Objectives of Financial Reporting
Importance of Financial Reporting
Limitations of Financial Reporting
Non-Financial Reporting
Board’s Report
Corporate Social Responsibility Report
Benefits of Sustainability Reporting
Global Reporting Initiative - Sustainability Reporting Framework
Sustainability Reporting Framework in India
Challenges in Mainstreaming Sustainability Reporting
Towards Integrated Reporting
Integrated Reporting by Listed Entities in India
Relation between Integrated Reporting and Sustainability Reporting
16. ETHICS AND BUSINESS (10 MARKS)
What Is Ethics
Business Ethics
Five Bottom Lines of the Future
Organisation Structure and Ethics
Four Fundamental Ethical Principles
Ethical Dilemma
 Code of Ethics
Indian Ethos
Code of Conduct
Advantages of Business Ethics
17. CSR AND SUSTAINABILITY
Corporate Social Responsibility (CSR)
Factors Influencing CSR
Triple Bottom Line Approach of CSR
Corporate Citizenship – Beyond the Mandate of Law
Global Principles and Guidelines
Corporate Sustainability
United Nations Global Compact’s Ten Principles, 2000
CSR and Sustainability in India
Sustainable Development
The 2030 Agenda for Sustainable Development
Sustainability Indices
Measuring Business Sustainability
Altman Z-Score
Risk-Adjusted Return On Capital - Raroc
Economic Value Added (EVA)
Market Value Added (MVA)
Sustainable Value Added
18. ANTI-CORRUPTION AND ANTI-BRIBERY LAWS IN INDIA
Bribery and Corruption - Global Scenarios
Delhi Special Police Establishment Act, 1946
Unlawful Activities (Prevention) Act, 1967
Foreign Corrupt Practices Act, 1977 (The FCPA)
Prevention of Corruption Act, 1988 (The PCA)
Central Vigilance Commission Act, 2003
Lokpal and Lokayukta Act, 2013 (The LLA)
ICSI Anti Bribery Code
 CHAPTER 1

Conceptual Framework of Corporate Governance

MEANING AND  The way by which a company is managed and organized to ensure that all
DEFINITIONS OF the Financial Stakeholders (Including Shareholders and Creditors) receive
CORPORATE their fair shares of the company Earnings and Assets.
GOVERNANCE
 “Corporate Governance is the application of best management practices,
compliance of law in true letter and spirit and adherence to ethical
standards for effective management and distribution of wealth and
discharge of social responsibility for sustainable development of all
stakeholders.”
The Institute of Company Secretaries of India

 “Corporate governance involves a set of relationships between a

company’s management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining
those objectives and monitoring performance are determined.”
OECD Principles of Corporate Governance

Advantages of  Good corporate governance ensures corporate success and economic

Corporate growth.
Governance  There is a positive impact on the share price.
 It helps in brand formation and development.
 It ensures organization in managed in a manner that fits the best
interests of all.
 It enhances Transparency, Accountability and Disclosure.(ADT)
NEED FOR Corporate Governance is needed to create a corporate culture of transparency,
CORPORATE accountability and disclosure.(ADT)
GOVERNANCE
Corporate
performance

Enhanced
Accountability
Investor Trust

Need for corporate

governance

Easy Finance Better Acess to

from instituions Global Market

Combarting
corruption

Corporate Performance
 Improved governance structures and processes.
 Ensure quality decision-making.
 Enhance the long-term prosperity of companies.
Enhanced Investor Trust
 Investors who are provided with high levels of disclosure and
transparency such as relating to data on matters such as pay governance,
pay components, performance goals, and the rationale for pay decisions
 etc. are likely to invest openly in those companies.
Better Access to Global Market
 Good corporate governance systems attract investment from global
investors, which subsequently leads to greater efficiencies in the financial
sector.
 Even if corporations do not rely primarily on foreign sources of capital,
adherence to good corporate governance practices helps improve the
confidence of domestic investors, reduces the cost of capital, enables
good functioning of financial markets and ultimately leads to more stable
sources of finance.
Combating Corruption
 Corporate Governance enables a corporation to -compete more
efficiently and prevent fraud and malpractices within the organization.
Easy Finance from Institutions
 Corporate Governance is needed as it indicate that well-governed
companies receive higher market valuations.
 The credit worthiness of a company can be trusted on the basis of
corporate governance practiced in the company.
Accountability
 Good Corporate Governance practices create the environment whereby
Boards cannot ignore their accountability to these stakeholders.
 The company is hence obliged to make timely disclosures on regular basis
to all its shareholders in order to maintain good investor relation.
ELEMENTS / SCOPE Important elements of good corporate governance.
OF GOOD
CORPORATE Role and Power
of Board
GOVERNANCE
Risk
Board skills
Management

Elements/Scope

Audit Board
committee Appointment

Board
Independence

Role and power of Board

Directors are elected by shareholders or appointed by other board members and
are tasked with making important decisions, such as corporate officer
appointments, executive compensation and dividend policy.
The Board as a main functionary is primary responsible to ensure value creation
for its stakeholders.
The Requirement of good governance is the clear identification of powers, roles,
responsibilities and accountability of the Board, CEO, and the Chairman of the
board.
The role of the Board should be clearly documented in a Board Charter.
Board Skills
A Board should have a mix of the following skills, knowledge and experience: –
Operational or technical expertise, commitment to establish leadership; –
Financial skills; Legal skills; and – Knowledge of Government and regulatory
requirement.
Board Appointment
The role of the board of directors was summarized by the King Report (a South
 African report on corporate governance) as:
• to define the purpose of the company
• to define the values by which the company will perform its daily duties
• to identify the stakeholders relevant to the company .
Board Independence
Independent Board with sufficient independent directors is essential for sound
corporate governance and would ensure that there are no actual or perceived
conflicts of interest.
Audit Committee
The Audit Committee is inter alia responsible for liaison with the management;
internal and statutory auditors, reviewing the adequacy of internal control. The
quality of Audit Committee significantly contributes to the governance of the
company.
Risk Management
Risk is an important element of corporate functioning and governance.
There should be a clearly established process of identifying, analyzing and
treating risks, which could prevent the company from effectively achieving its
objectives.
Corporate Evolution of corporate governance:
Governance A. Agency Theory
Theories. According to this theory, managers act as ‘Agents’ of the corporation. The
owners set the central objectives of the corporation. Managers are
responsible for carrying out these objectives in day-to-day work of the
company.
In agency theory, the owners are the principals. But principals may not have
knowledge or skill for getting the objectives executed. Thus, principal authorises
the mangers to act as ‘Agents’ and a contract between principal and agent is
made. Under the contract of agency, the agent should act in good faith. He
should protect the interest of the principal and should remain faithful to the
goals.
B. Shareholders Theory/Stockholders Theory
According to this theory, it is the corporation which is considered as the property
of shareholders/ stockholders. They can dispose off this property, as they like.
They want to get maximum return from this property.
The owners seek a return on their investment and that is why they invest in a
corporation. So the directors are responsible for any damage or harm done to
their property i.e., the corporation. The role of managers is to maximise the
wealth of the shareholders.
C. Stakeholders Theories
“Stakeholder Theory is an idea about how business really works. It says that for
any business to be successful it has to create value for customers, suppliers,
employees, communities and financiers, shareholders, banks and others people
with the money”.
Their interest has to go together in the same directions. According to this theory,
the company is seen as an input-output model and from their point of view, a
corporation exists for them and not the shareholders alone.
Even the companies Act, 2013 provides various sections for the stakeholders such
as:
 Section 135: Corporate Social Responsibility
 Section 166(2): Duties of Directors
 Schedule IV: Role and Function Of Independent Director
 Regulation 4 of SEBI(LODR)Regulations 2018: Corporate Governance
Principles.
D. Stewardship Theories
The word ‘steward’ means a person who manages another’s property or estate.
Here, the word is used in the sense of guardian in relation to a corporation, this
 theory is value based. The managers and employees are to safeguard the
resources of corporation and its property and interest when the owner is absent.
They are like a caretaker. They have to take utmost care of the corporation. They
should not use the property for their selfish ends.
 First, of all values as standards are identified and formulated.
 Second, step is to develop training programmes.
 Thirdly, moral support is important to fill any gaps in values.
Management VS CONCEPT OF MANAGEMENT VS. OWNERSHIP
Ownership The shareholders vest control of the business in the board of directors, who
employ specialist management to run the business and return the profits of the
business back to the shareholders.
Company law’s central dilemma has been the separation of ownership and control
in companies.
 On one side are shareholders, the ostensible owners;
 On the other side are corporate officers.
Shareholders own the company and hence the company ought to be work
according to the dictates of the shareholders. However, it is not practically
possible for each shareholder to participate in the decision making process on a
day-to-day basis. Further shareholders generally cannot know and manage the
full details of a corporation’s business (nor do many wish to), they elect a board
of directors to make broad corporate policy.
Majority VS CONCEPT OF MAJORITY RULE VS. MINORITY INTEREST.
Minority As a company is an artificial person with no physical existence, it functions
through the instrumentality of the board of directors who is guided by the wishes
of the majority.
The rule of majority was established way back in 1843 in the case of Foss v.
Harbottle.

Stages of development of Corporate Governance in USA

YEAR DEVELOPMENT

The Foreign Corrupt Practices Act, Review of systems of internal control.

1977

US Securities Exchange Commission, Prescribed mandatory reporting on internal financial

1979 controls.

Treadway commission, 1985 A proper control environment, desirability of constituting

independent boards and its committees and objective
internal audit function.

COSO issued Internal Control – “To help businesses and other entities assess and enhance
Integrated Framework, 1992 their internal control systems”.

Sarbanes – Oxley Act, 2002 Enhanced financial disclosures and severe penalties for willful
default by managers and auditors, in particular.

The Dodd-Frank Wall Street Reform The Dodd-Frank Act is a comprehensive and complex bill that
and Consumer Protection Act, 2010 contains 16 major areas of reform.

Some of the main provisions found in the Dodd-Frank Act

include:
I. Banks are required to come up with plans for a
quick shutdown if they approach bankruptcy or run
out of money.
II. Financial institutions must increase the amount of
money they hold in reserve to account for potential
future slumps.
 Development of Corporate Governance in UK

1992, Cadbury Report The committee in its report known as “Cadbury

Report” recommended mainly:
 Separation of role of CEO and Chairman
of the Board.
 Balance composition of Board of
directors with executive and non-
executive directors.
 Selection process of Non-Executive
Directors.
 Audit fees should be made public.
1995 Greenbury Report The group submitted its Report in 1995, major
findings were as under:
 Constitution of Remuneration
Committee comprising of Non Executive
Directors.
 Responsibility of the committee in
determining the remuneration of CEO
and Executive Directors.
 Responsibility of the committee in
determining the remuneration policy.
1999 Turnbull Report A working group under the chairmanship of
NIGEL TRUMBULL recommended the Internal
Control Guidance for Directors on combined
code.
2010 - 2012 Stewardship Code The Stewardship Code aims to enhance the
quality of engagement between institutional
investors and companies to help improve long-
term returns to shareholders and the efficient
exercise of governance responsibilities.

2003 Higgs Report The resulting Report proposed that:

 At least half of a board (excluding the
Chair) be comprised of nonexecutive
directors;
 That the non-executives should meet
at least once a year in isolation to
discuss company performance;
 That a senior independent director be
nominated and made available for
shareholders to express any concerns
to; and
 That potential non-executive directors
should satisfy themselves that they
 possess l the knowledge, experience,
skills and time to carry out their duties.

U.S. Securities and Exchange Commission:

The aim of U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient
markets, and facilitate capital formation. The SEC oversees the key participants in the securities world,
including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds.

The SEC is the primary overseer and regulator of the U.S. securities markets. It works closely with many other
institutions, including Congress, other federal departments and agencies, the self-regulatory organizations
(e.g. the stock exchanges), state securities regulators, and various private sector organizations. In addition, the
Chairman of the SEC represents the agency as a member of the Financial Stability Oversight Council (FSOC).

Sarbanes-Oxley Act of 2002

In 2002, the United States Congress passed the Sarbanes-Oxley Act (SOX) to protect shareholders and the
general public from accounting errors and fraudulent practices in enterprises, and to improve the accuracy of
corporate disclosures. Congressmen Paul Sarbanes and Michael Oxley drafted the act with the goal of improving
corporate governance and accountability, in light of the financial scandals that occurred at Enron, WorldCom,
and Tyco, among others.

The summary highlights of the most important Sarbanes-Oxley sections for compliance are listed below.

 SOX Section 302 – Corporate Responsibility for Financial Reports.

 SOX Section 401: Disclosures in Periodic Reports.
 SOX Section 404: Management Assessment of Internal Controls.

2018 UK Corporate Governance Code (2018 Code)

Heading Principles
BOARD LEADERSHIP AND  The board should establish the company’s purpose, values
COMPANY PURPOSE and strategy, and satisfy itself that these and its culture
are aligned. All directors must act with integrity, lead by
example and promote the desired culture.
 In order for the company to meet its responsibilities to
shareholders and stakeholders, the board should ensure
effective engagement with, and encourage participation
from, these parties.

DIVISION OF RESPONSIBILITIES  The board should include an appropriate combination of

executive and non-executive (and, in particular,
independent non-executive) directors, such that no one
individual or small group of individuals dominates the
board’s decision-making.
 Non-executive directors should have sufficient time to
meet their board responsibilities.

COMPOSITION, SUCCESSION  The board and its committees should have a combination
AND EVALUATION of skills, experience and knowledge.
 Annual evaluation of the board should consider its
composition, diversity and how effectively members work
 together to achieve objectives.

AUDIT, RISK AND INTERNAL  The board should present a fair, balanced and
CONTROL understandable assessment of the company’s position
and prospects.

REMUNERATION  Remuneration policies and practices should be designed

to support strategy and promote long-term sustainable
success.
 Directors should exercise independent judgement and
discretion when authorising remuneration outcomes,
taking account of company and individual performance,
and wider circumstances.

Corporate Governance Principles and Recommendations, Australia -2019

Central Principles
1. Lay solid foundations for management and oversight: A listed entity should clearly delineate the respective
roles and responsibilities of its board and management and regularly review their performance.

2. Structure the board to be effective and add value: The board of a listed entity should be of an appropriate
size and collectively have the skills, commitment and knowledge of the entity and the industry in which it
operates, to enable it to discharge its duties effectively and to add value.

3. Instil a culture of acting lawfully, ethically and responsibly: A listed entity should instil and continually
reinforce a culture across the organisation of acting lawfully, ethically and responsibly.

4. Safeguard the integrity of corporate reports: A listed entity should have appropriate processes to verify the
integrity of its corporate reports.

5. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of all
matters concerning it that a reasonable person would expect to have a material effect on the price or value of its
securities.

6. Respect the rights of security holders: A listed entity should provide its security holders with appropriate
information and facilities to allow them to exercise their rights as security holders effectively.
7. Recognise and manage risk: A listed entity should establish a sound risk management framework and
periodically review the effectiveness of that framework.
8. Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to attract and
retain high quality directors and design its executive remuneration to attract, retain and motivate high quality
senior executives and to align their interests with the creation of value for security holders and with the entity’s
values and risk appetite.

Code of Corporate Governance, Singapore - 2018

Principles

1. The company is headed by an effective Board which is collectively responsible and works with Management
for the long-term success of the company.

2. The Board has an appropriate level of independence and diversity of thought and background in its
composition to enable it to make decisions in the best interests of the company.
3. There is a clear division of responsibilities between the leadership of the Board and Management, and no one
individual has unfettered powers of decision-making.
4. The Board has a formal and transparent process for the appointment and reappointment of directors, taking
into account the need for progressive renewal of the Board.

5. The Board undertakes a formal annual assessment of its effectiveness as a whole, and that of each of its
board committees and individual directors.

6. The Board has a formal and transparent procedure for developing policies on director and executive
remuneration, and for fixing the remuneration packages of individual directors and key management personnel.
No director is involved in deciding his or her own remuneration.

7. The level and structure of remuneration of the Board and key management personnel are appropriate and
proportionate to the sustained performance and value creation of the company, taking into account the
strategic objectives of the company.

8. The company is transparent on its remuneration policies, level and mix of remuneration, the procedure for
setting remuneration, and the relationships between remuneration, performance and value creation.

9. The Board is responsible for the governance of risk and ensures that Management maintains a sound system
of risk management and internal controls, to safeguard the interests of the company and its shareholders.

10. The Board has an Audit Committee (“AC”) which discharges its duties objectively.

11. The company treats all shareholders fairly and equitably in order to enable them to exercise shareholders’
rights and have the opportunity to communicate their views on matters affecting the company. The company
gives shareholders a balanced and understandable assessment of its performance, position and prospects.
12. The company communicates regularly with its shareholders and facilitates the participation of shareholders
during general meetings and other dialogues to allow shareholders to communicate their views on various
matters affecting the company.

13. The Board adopts an inclusive approach by considering and balancing the needs and interests of material
stakeholders, as part of its overall responsibility to ensure that the best interests of the company are served.

King IV Report on Corporate Governance, South Africa – 2016

Four reports have been issued by the King Committee since then –

 (King I), 1994

 (King II), 2002
 (King III), 2009 and
 (King IV) 2016.

GOVERNANCE ELEMENT PRINCIPLES

LEADERSHIP, ETHICS AND 1. The governing body should lead ethically and effectively.
CORPORATE CITIZENSHIP 2. The governing body should ensure that the organisation is and
is seen to be a responsible corporate citizen.

STRATEGY, 3. The governing body should appreciate that the organisation’

PERFORMANCE AND score purpose, its risks and opportunities, strategy, business
REPORTING model, performance and sustainable development are all
inseparable elements of the value creation process.

GOVERNING STRUCTURES
AND DELEGATION
4. The governing body should serve as the focal point and
custodian of corporate governance in the organisation.
5. The governing body should ensure that the appointment of,
and delegation to, management contribute to role clarity and
the effective exercise of authority and responsibilities.
 GOVERNANCE 6. The governing body should govern risk in a way that supports
FUNCTIONAL AREAS the organisation in setting and achieving its strategic
objectives.
7. The governing body should govern technology and
information in a way that supports the organisation setting
and achieving its strategic objectives.

STAKEHOLDER 8. The governing body of an institutional investor organisation

RELATIONSHIPS should ensure that responsible investment is practiced by the
organisation to promote the good governance and the
creation of value by the companies in which it invests.

OECD PRINCIPLES OF CORPORATE GOVERNANCE

The Principles provide guidance through recommendations and annotations across six chapters.

I. Ensuring the basis for an effective corporate governance framework:

The corporate governance framework should promote transparent and fair markets, and the efficient
allocation of resources. It should be consistent with the rule of law and support effective supervision
and enforcement:
A. The legal and regulatory requirements that affect corporate governance practices should be
consistent with the rule of law, transparent and enforceable.
B. The division of responsibilities among different authorities should be clearly articulated and
designed to serve the public interest.
C. Stock market regulation should support effective corporate governance.
D. Cross-border co-operation should be enhanced, including through bilateral and multilateral
arrangements for exchange of information.
II. The rights and equitable treatment of shareholders and key ownership functions:
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights
and ensure the equitable treatment of all shareholders, including minority and foreign shareholders.
All shareholders should have the opportunity to obtain effective redress for violation of their rights:
A. Basic shareholder rights should include the right to:
 secure methods of ownership registration;
 convey or transfer shares;
 participate and vote in general shareholder meetings;
 elect and remove members of the board; and
 share in the profits of the corporation.
B. Shareholders should be sufficiently informed about, and have the right to approve or
participate in, decisions concerning fundamental corporate changes such as:
 amendments to the statutes, or articles of incorporation or similar governing
documents of the company;
 the authorisation of additional shares;
 extraordinary transactions, including the transfer of all or substantially all assets, that
in effect result in the sale of the company.
C. Shareholders should have the opportunity to participate effectively and vote in general
shareholder meetings and should be informed of the rules, including voting procedures, that
govern general shareholder meetings:
 Shareholders should be furnished with sufficient and timely information concerning the
date, location and agenda of general meetings, as well as full and timely information
regarding the issues to be decided at the meeting.
  Shareholders should have the opportunity to ask questions to the board, including
questions relating to the annual external audit, to place items on the agenda of general
meetings.
 Effective shareholder participation in key corporate governance decisions, such as the
nomination and election of board members, should be facilitated.
 Impediments to cross border voting should be eliminated.
D. Shareholders, including institutional shareholders, should be allowed to consult with each
other on issues concerning their basic shareholder rights as defined in the Principles, subject to
exceptions to prevent abuse.
E. All shareholders of the same series of a class should be treated equally.
 Within any series of a class, all shares should carry the same rights. All investors should
be able to obtain information about the rights attached to all series and classes of
shares before they purchase.
 The disclosure of capital structures and control arrangements should be required.
 Any changes in economic or voting rights should be subject to approval by those
classes of shares which are negatively affected.
F. Related-party transactions should be approved and conducted in a manner that ensures proper
management of conflict of interest and protects the interest of the company and its
shareholders.
G. Minority shareholders should be protected from abusive actions by, or in the interest of,
controlling shareholders acting either directly or indirectly, and should have effective means of
redress.
H. Markets for corporate control should be allowed to function in an efficient and transparent
manner.
 Anti-take-over devices should not be used to shield management and the board from
accountability.
III. Institutional investors, stock markets, and other intermediaries:
The corporate governance framework should provide sound incentives throughout the investment
chain and provide for stock markets to function in a way that contributes to good corporate
governance:
A. Votes should be cast by custodians or nominees in line with the directions of the beneficial
owner of the shares.
B. Institutional investors acting in a fiduciary capacity should disclose how they manage material
conflicts of interest that may affect the exercise of key ownership rights regarding their
investments.
C. Insider trading and market manipulation should be prohibited and the applicable rules
enforced.
D. Stock markets should provide fair and efficient price discovery as a means to help promote
effective corporate governance.
IV. The role of stakeholders in corporate governance:
A. The rights of stakeholders that are established by law or through mutual agreements are to be
respected.
B. stakeholders should have the opportunity to obtain effective redress for violation of their
rights.
C. Mechanisms for employee participation should be permitted to develop.
D. The corporate governance framework should be complemented by an effective, efficient
insolvency framework and by effective enforcement of creditor rights.
V. Disclosure and transparency:
 The corporate governance framework should ensure that timely and accurate disclosure is made on all
material matters regarding the corporation, including the financial situation, performance, ownership,
and governance of the company:
A. Disclosure should include:
 The financial and operating results of the company.
 Company objectives and non-financial information.
 Major share ownership, including beneficial owners, and voting rights.
 Remuneration of members of the board and key executives.
 Related party transactions.
B. Information should be prepared and disclosed in accordance with high quality standards of
accounting and financial and non-financial reporting.
C. An annual audit should be conducted by an independent, competent and qualified, auditor in
accordance with high-quality auditing standards in order to provide the financial statements
fairly represent the financial position and performance of the company.
VI. The responsibilities of the board:
The corporate governance framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the board’s accountability to the company and
the shareholders:
A. Board members should act on a fully informed basis, in good faith, with due diligence and care,
and in the best interest of the company and the shareholders.
B. Where board decisions may affect different shareholder groups differently, the board should
treat all shareholders fairly.
C. The board should apply high ethical standards. It should take into account the interests of
stakeholders.
D. The board should fulfil certain key functions, including:
 Selecting, compensating, monitoring and, when necessary, replacing key executives
and overseeing succession planning.
 Ensuring a formal and transparent board nomination and election process.
 Overseeing the process of disclosure and communications.
 Monitoring the effectiveness of the company’s governance practices and making
changes as needed.
E. The board should be able to exercise objective independent judgement on corporate affairs.
 Board members should be able to commit themselves effectively to their
responsibilities.
 Boards should consider assigning a sufficient number of nonexecutive board members
capable of exercising independent judgement to tasks where there is a potential for
conflict of interest.
F. In order to fulfil their responsibilities, board members should have access to accurate, relevant
and timely information.

Kautilya’s fourfold duty of a king (Evidence of Corporate Governance from Arthashastra).

Raksha Raksha- literally means protection, in the corporate scenario it can be
equated with the risk management aspect.
Vriddhi Vriddhi – literally means growth, in the present day context can be equated
to stakeholder value enhancement
Palana Palana – literally means maintenance/compliance, in the present day
context it can be equated to compliance to the law in letter and spirit.
Yogakshema Yogakshema – literally means well being and in Kautilya’s Arthashastra it is
used in context of a social security system. In the present day context it can
be equated to corporate social responsibility.
CORPORATE GOVERNANCE – CONTEMPORARY DEVELOPMENTS IN INDIA
The initiatives taken by Government of India in 1991, aimed at economic liberalization, privatization and
globalization(LPG) of the domestic economy.
1999 Kumar Mangalam Birla Committee
2002 Naresh Chandra Committee
2003 N. R. Narayana Murthy Committee
2004 Dr. J. J. Irani Committee on Company Law
2013 Companies Act
The Securities and Exchange Board of India
(SEBI) had set up a Committee on May 7, 1999
under the Chairmanship of Kumar Mangalam
Birla to promote and raise standards of
corporate governance.
The recommendations of the Report, led to
inclusion of Clause 49 in the Listing Agreement in
the year 2000.
Due to the various scams in US like WORLD COM
etc. and the enactment of Sarbanes Oxley Act in
USA the Indian government wake up and
constituted a committee under a chairmanship
of Naresh Chandra. Naresh Chandra committee
was appointed to examine and recommend
about the ROLE OF INDEPENDENT DIRECTORS.
SERVICES NOT TO BE PERFORMED BY
STATUTORY AUDITOR(SEC.144).
SEBI constituted a Committee under the
Chairmanship of Shri N. R. Narayana Murthy, for
reviewing implementation of the corporate
governance code by listed companies and for
issue of revised clause 49 based on its
recommendations.
The Government constituted a committee under
the Chairmanship of Dr. J. J. Irani with the
objective to have a simplified compact law that
would be able to address the changes taking
place in the national and international scenario.
The Companies Act, 2013 envisaged radical
changes in the sphere of Corporate Governance
in India. The Companies (Amendment) Act, 2017
consisting of 93 amendments to the 2013
Companies Act, further resulted in changes
related to legal definitions (related party,
subsidiary company, associate company,
independent directors, etc.) corporate
governance, (eg. Ratification of auditors
appointment and role of audit committee) and
management compliance.
Some of the Provisions of Companies Act, 2013
related to Corporate Governance are:
 Appointment and maximum tenure of
Independent Directors;
 Appointment of Woman Director;
 Appointment of Whole time Key
Managerial Personnel;
 Performance Evaluation of the Directors

2015 SEBI (Listing Obligations and Disclosure
Requirements) Regulations (REFER SEBI
LODR NOTES)
2017 Uday Kotak Committee
and Committee & Board as a whole;
 Separation of role of Chairperson and
Chief Executive Officer;
 Mandatory provisions regarding vigil
mechanism;
 Constitution of CSR Committee;
 Secretarial Audit;
 Rotation of Auditors;
 Constitution of NFRA.
The provisions pertaining to listed entities with
the Companies Act, 2013, the SEBI notified SEBI
(Listing Obligations and Disclosure Requirements)
Regulations, 2015 for the listed entities having
listed designated securities on recognized stock
exchanges.
The SEBI Committee on corporate governance
was formed in June 2017 under the
Chairmanship of Mr.Uday Kotak with the aim of
improving standards of corporate governance of
listed companies in India.
The Committee was requested to make
recommendations to SEBI on the following issues:
 Ensuring independence in spirit of
Independent Directors and their active
participation in functioning of the
company;
 Improving safeguards and disclosures
pertaining to Related Party Transactions;
 Issues in accounting and auditing
practices by listed companies;
 Improving effectiveness of Board
Evaluation practices;
 Addressing issues faced by investors on
voting and participation in general
meetings; l Disclosure and transparency
related issues, if any;
 Any other matter, as the Committee
deems fit.
The Committee submitted its report to SEBI in
October 2017.
 Composition and Role of the Board of
Directors;
 Institution of Independent Directors;
 Board Committees;
 Disclosures and Transparency;
 Accounting and Audited related Issues;
 Investors participation in Meetings of
Listed Entities;
 Governance aspects of Public Sector
Enterprises.
In its board meeting on March 27, 2018, SEBI,
after detailed consideration and due deliberation,
accepted several recommendations of the Kotak
Committee without any modifications and
accepted a few other recommendations with
certain modifications as to timelines for
implementation, applicability thresholds among
others. Some of the major changes accepted
relate to:
 Increasing Transparency -Enhanced
Disclosure Requirements;
 Disclosure of Expertise/Skills of Directors;
 Enhanced Disclosure of Related Party
Transactions (RPT);
 Mandatory Disclosure of Consolidated
Quarterly Results with effect from
Financial Year 2019-2020;
 Enhanced Quorum;
 Capping the Maximum Number of
Directorships;
 Expanded Eligibility Criteria for
Independent Directors;
 Enhanced Role of committees;
 Down-streaming Corporate Governance;
 Secretarial Audit to be Mandatory for
Listed Entities and their Material Unlisted
Subsidiaries.
 SOME EXAMINATION QUESTIONS

1. Good Governance is integral to the very existence of a company-Explain.

2. What are the elements of Good Corporate Governance?
3. What are the basic theories of that led to the evolution of concept of the Corporate
Governance?
4. Discuss in brief the development of the concept of Corporate Governance in U.K.
5. Discuss briefly the Corporate Governance developments in India.
6. Briefly explain OECD principles of Corporate Governance.
7. What are Kautilya’s fourfold duty of a king? Or Evidence of CG from Arthashatra.
8. ICSI principles of Corporate Governance, inter alia, include sustainable development of all
stakeholders and adherence to ethical standers. COMMENT
9. How has the SEBI contributes in improving CG Standards in India?
10. Write a short note on:
 U.S. Securities and Exchange Commission
 Sarbanes-Oxley Act of 2002
 CHAPTER 2

Legislative Framework of Corporate Governance in India

PRINCIPLES FOR PERIODIC DISCLOSURES AND FOR CORPORATE GOVERNANCE

Regulation 4 of the SEBI (LODR) Regulations, 2015 provides for broad

 Principles for periodic disclosures and
 Corporate governance by listed entities.

A. Principles for Periodic Disclosures: The listed entity which has listed securities shall make disclosures
and abide by its obligations under these regulations, in accordance with the following principles:
a. Information shall be prepared and disclosed in accordance with applicable standards of
accounting and financial disclosure.
b. The listed entity shall refrain from misrepresentation and ensure that the information
provided to recognised stock exchange(s) and investors is not misleading.
c. The listed entity shall provide adequate and timely information to recognised stock
exchange(s) and investors.
d. Filings, reports, statements, documents and information which are event based or are
filed periodically shall contain relevant information.
e. Periodic filings, reports, statements, documents and information reports shall contain
information that shall enable investors to track the performance of a listed entity over
regular intervals of time and shall provide sufficient information to enable investors to
assess the current status of a listed entity.

B. Corporate Governance Principles : The listed entity which has listed its specified securities shall comply
with the corporate governance principles under following broad headings- :

The Rights of
Shareholders

Responsibilities
Timely
of The Board of
Information
Directors

Corporate
Governance
Principles

Disclosure and Equitable

Transparency information

Role of
Stakeholders in
Corporate
Governance
a. The rights of shareholders : The listed entity shall seek to protect and facilitate the exercise of the
following rights of shareholders:
 Right to participate in, and to be sufficiently informed of, decisions concerning fundamental
corporate changes.
 Opportunity to participate effectively and vote in general shareholder meetings.
 Opportunity to ask questions to the board of directors, to place items on the agenda of general
meetings, and to propose resolutions, subject to reasonable limitations.
 Exercise of ownership rights by all shareholders, including institutional investors.
 Adequate mechanism to address the grievances of the shareholders.
 Protection of minority shareholders.
b. Timely information: The listed entity shall provide adequate and timely information to shareholders,
including but not limited to the following:
 Sufficient and timely information concerning the date, location and agenda of general
meetings, as well as full and timely information regarding the issues to be discussed at the
meeting.

c. Equitable treatment: The listed entity shall ensure equitable treatment of all shareholders, including
minority and foreign shareholders, in the following manner:
 All shareholders of the same series of a class shall be treated equally.
 Exercise of voting rights by foreign shareholders shall be facilitated.
 The listed entity shall devise a framework to avoid insider trading and abusive self-dealing.
d. Role of stakeholders in corporate governance: The listed entity shall recognise the rights of its
stakeholders and encourage co-operation between listed entity and the stakeholders, in the following
manner:
 Stakeholders shall have the opportunity to obtain effective redress for violation of their rights.
 The listed entity shall devise an effective whistle blower mechanism enabling stakeholders,
including individual employees and their representative bodies, to freely communicate their
concerns about illegal or unethical practices.

e. Disclosure and transparency: The listed entity shall ensure timely and accurate disclosure on all material
matters including the financial situation, performance, ownership, and governance of the listed entity, in
the following manner:
 Information shall be prepared and disclosed in accordance with the prescribed standards of
accounting, financial and non-financial disclosure.
 Minutes of the meeting shall be maintained explicitly recording dissenting opinions, if any.

f. Responsibilities of the board of directors: The board of directors of the listed entity shall have the
following responsibilities:
i. Disclosure of information:
 Members of board of directors and key managerial personnel shall disclose to
the board of directors whether they, directly, indirectly, or on behalf of third
 parties, have a material interest in any transaction or matter directly affecting
the listed entity.
 The board of directors and senior management shall maintaining
confidentiality of information in order to foster a culture of good
decisionmaking.

ii. Key functions of the board of directors :

 Monitoring the effectiveness of the listed entity’s governance practices and
making changes as needed.
 Selecting, compensating, monitoring and, when necessary, replacing key
managerial personnel and overseeing succession planning.
 Monitoring and managing potential conflicts of interest of management,
members of the board of directors and shareholders, including misuse of
corporate assets and abuse in related party transactions.
 Overseeing the process of disclosure and communications.
 Monitoring and reviewing board of director’s evaluation framework.
iii. Other responsibilities:
 The board of directors shall provide strategic guidance to the listed entity,
ensure effective monitoring of the management and shall be accountable to
the listed entity and the shareholders.
 The board of directors shall set a corporate culture.
 Members of the board of directors shall act on a fully informed basis, in good
faith, with due diligence and care, and in the best interest of the listed entity
and the shareholders.
 The board of directors shall encourage continuing directors training to ensure
that the members of board of directors are kept up to date.
 The board of directors shall maintain high ethical standards.
 The board of directors shall exercise objective independent judgement on
corporate affairs.
 When committees of the board of directors are established, their mandate,
composition and working procedures shall be well defined and disclosed by the
board of directors.
 In order to fulfil their responsibilities, members of the board of directors shall
have access to accurate, relevant and timely information.

CORPORATE GOVERNANCE OF BANKING AND FINANCIAL INSTITUTIONS

Banking and financial institutions are the strong backbone of any economy. Functioning of banking and financial
institutions differs with other corporate entities in many ways which makes good corporate governance of banks
very critical and important. RBI had undertaken several measures to strengthen the corporate governance in the
Indian banking sector.

Presently Indian banking sector comprises of Scheduled and Non Scheduled banks, co-operative banks,
commercial banks dominated by the government-managed banks including public sector banks, nationalized
banks and rural banks, etc. These banks in our country have been established under the different statutes.

 The major law relating to the banking is governed by the Banking Regulation Act 1949.
 The State Bank of India is governed by the State Bank of India Act, 1955.
  Nationalized banks are governed by the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
 The private sector banks came into being as company registered under the Companies Act (whether
under the Companies Act, 2013/1956 or under the Indian Companies Act, 1913 or prior to that).
 The banks listed with the stock exchange have to adhere to the requirement of the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2018.
 Additionally Foreign Exchange Management Act (FEMA), 1999, Payment and Settlement Systems Act,
2007 and other directives/ regulations/ guidelines/ instructions issued by RBI and SEBI from time to
time have created a positive environment and future scope for enhancing corporate governance.

Ganguly Committee Recommendations on Corporate Governance in Banks

The list of the recommendations is as under:
Recommendations which may be implemented by all banks:

I. Responsibilities of the Board of Directors:

a. A strong corporate board should fulfil the following four major roles:
 Overseeing the risk profile of the bank,
 Monitoring the integrity of its business and control mechanisms,
 Ensuring the expert management, and
 Maximising the interests of its stakeholders.
b. The Board of Directors should ensure that responsibilities of directors are well defined
and every director should be familiarised on the functioning of the bank before his
induction, covering the following essential areas:
 Delegation of powers to various authorities by the Board,
 Strategic plan of the institution;
 Organisational structure;
 Financial and other controls and systems;
 Economic features of the market and competitive environment.
II. Role and responsibility of independent and non-executive directors:
a. The independent/non-executive directors have a prominent role in inducting and
sustaining a proactive governance framework in banks.
b. It would be desirable for the banks to take an undertaking from each independent and
nonexecutive director to the effect that he/she has gone through the guidelines defining
the role and responsibilities and enter into covenant to discharge his/her
responsibilities to the best of their abilities, individually and collectively.

III. Training facilities for directors:

a. While RBI can offer certain training programmes/seminars in this regard at its training
establishments, large banks may conduct such programmes in their own training
centres.
b. Need-based training programmes/seminars/ workshops may be designed by banks and
participation in such programmes could make the directors more sensitive to their
role.
IV. Agenda and minutes of the board meeting:
a. The draft minutes of the meeting should be forwarded to the directors, preferably via
the electronic media, within 48 hours of the meeting and ratification obtained from the
directors within a definite time frame.
 b. The Board should review the status of the action taken on points arising from the
earlier meetings till action is completed to the satisfaction of the Board, and any
pending item should be continued to be put up as part of the agenda items before the
Board.

V. Committees of the Board:

a. Shareholders’ Redressal Committee: As communicated to banks vide circular DBOD
No.111/08.138.001/2001-02 dated June 4, 2002 on SEBI Committee on Corporate
Governance , the banks which have issued shares,/debentures to public may form a
committee under the chairmanship of a non-executive director to look into redressal
of shareholders’ complaints.
b. Risk Management Committee: In pursuance of the Risk Management Guidelines issued
by the Reserve Bank of India in October 1999, every banking organisation is required to
set up Risk Management Committee. The formation and operationalisation of such
committee should be speeded up and their role further strengthened.
c. Supervisory Committee: The role and responsibilities of the Supervisory Committee as
envisaged by the Group viz.,
 Monitoring of the exposures (both credit and investment) of the bank,
 Review of the adequacy of the risk management process and
 Upgradation thereof, internal control system, ensuring compliance with the
statutory/regulatory framework etc., may be assigned to the Management
Committee/Executive Committee of the Board.

VI Disclosure and transparency: The following disclosures should be made by banks to the Board of
Directors at regular intervals as may be prescribed by the Board in this regard:

 Progress made in putting in place a progressive risk management system, and

risk management policy and strategy followed by the bank.
 Conformity with corporate governance standards viz. in composition of various
committees, their role and functions, periodicity of the meetings and
compliance with coverage and review functions etc.

Recommendations applicable only to public sector bank

1. Information flow: In order to improve manner in which the proceedings are recorded and followed up
in public sector banks, they may initiate measures to provide the following information to the board:
 A summary of key observations made by the directors which should be submitted in the next
board meeting.
 A more detailed recording of the proceedings which will clearly bring out the observations,
dissents, etc. by the individual directors which could be forwarded to them for their
confirmation.

2. Company Secretary: The Company Secretary has important fiduciary and Company Law responsibilities.
The Company Secretary is the nodal point for the Board to get feedback on the status of compliance by
the organisation in regard to provisions of the Company Law, listing agreements, SEBI regulations,
shareholder grievances, etc. In view of the important role performed by the Company Secretary vis-àvis
the functioning of the Boards of the banks, as also in the context of some of the public sector banks
having made public issue it may be necessary to have Company Secretary for these banks also. Banks
 should therefore consider appointing qualified Company Secretary as the Secretary to the Board and
have a Compliance Officer (reporting to the Secretary) for ensuring compliance with various
regulatory/ accounting requirements.

Recommendations applicable only to private sector bank

1. Eligibility criteria and ‘fit and proper’ norms for nomination of directors:
a. The Board of Directors of the banks while nominating/ co-opting directors should be guided by
certain broad ‘fit and proper’ norms for directors, viz. formal qualification, experience, track
record, integrity etc. The Board of Directors may, therefore, evolve appropriate systems for
ensuring ‘fit and proper’ norms for directors, which may include calling for information by way
of self-declaration, verification reports from market, etc.
b. The following criteria, which is in vogue in respect of nomination to the boards of public sector
banks, may also be followed for nominating independent/ non-executive directors on private
sector banks:
 The candidate should normally be a graduate (which can be relaxed while selecting
directors for the categories of farmers, depositors, artisans, etc.)
 He/she should be between 35 and 65 years of age.
 He/she should not be a Member of Parliament/Member of Legislative Assembly/
Member of Legislative Council.

2. Commonality of directors of banks and non banking finance companies (NBFC): In case, a director on
the board of an NBFC is to be considered for appointment as director on the board of the bank, the
following conditions must be followed:
 He/she is not the owner of the NBFC, [i.e., share holdings (single or jointly with
relatives, associates, etc.) should not exceed 50%] ;
 He/she is not related to the promoter of the NBFC;
 He/she is not a full-time employee in the NBFC;
 The concerned NBFC is not a borrower of the bank.
3. Composition of the Board: In the context of banking becoming more complex and competitive, the
composition of the Board should be commensurate with the business needs of the banks. There is an
urgent need for making the Boards of banks more contemporarily professional by inducting technical
and specially qualified personnel.

Basel Committee on Corporate Governance

Basel Committee on Banking Supervision (BCBS) released Guidelines on Corporate Governance for banks
were released by the Basel Committee on Banking Supervision in July 2015.
The principles of corporate governance of these guidelines are as under:
 Principle 1: Board’s overall responsibilities: The board has overall responsibility for the bank,
including approving and overseeing the implementation of the bank’s strategic objectives,
governance framework and corporate culture. The board is also responsible for providing
oversight of senior management.
 Principle 2: Board qualifications and composition: Board members should be and remain
qualified, individually and collectively, for their positions. They should understand their
oversight and corporate governance role and be able to exercise sound, objective judgment
about the affairs of the bank.
  Principle 3: Board’s own structure and practices: The board should define appropriate
governance structures and practices for its own work, and put in place the means for such
practices to be followed and periodically reviewed for ongoing effectiveness.
 Principle 4: Senior management: Under the direction and oversight of the board, senior
management should carry out and manage the bank’s activities in a manner consistent with the
business strategy, risk appetite, remuneration and other policies approved by the board.
 Principle 5: Governance of group structures: In a group structure, the board of the parent
company has the overall responsibility for the group and for ensuring the establishment and
operation of a clear governance framework. The board and senior management should know
and understand the bank group’s operational structure and the risks that it poses.
 Principle 6: Risk management function: Banks should have an effective independent risk
management function, under the direction of a chief risk officer (CRO).
 Principle 7: Risk identification, monitoring and controlling: Risks should be identified,
monitored and controlled on an ongoing bank-wide and individual entity basis.
 Principle 8: Risk communication: An effective risk governance framework requires robust
communication within the bank about risk, both across the organisation and through reporting
to the board and senior management.
 Principle 9: Compliance: The bank’s board of directors is responsible for overseeing the
management of the bank’s compliance risk. The board should approve the bank’s compliance
approach and policies, including the establishment of a permanent compliance function.
 Principle 10: Internal audit: The internal audit function provides independent assurance to the
board and supports board and senior management in promoting an effective governance
process and the longterm soundness of the bank.
 Principle 11: Compensation: The bank’s compensation structure should be effectively aligned
with sound risk management and should promote long term health of the organisation and
appropriate risktaking behavior.
 Principle 12: Disclosure and transparency: The governance of the bank should be adequately
transparent to its shareholders, depositors, other relevant stakeholders and market participants.
 Principle 13: The role of supervisors: Supervisors should provide guidance for and supervise
corporate governance at banks, including through comprehensive evaluations and regular
interaction with boards and senior management, should require improvement and remedial
action as necessary, and should share information on corporate governance with other
supervisors.

GUIDELINES ON CORPORATE GOVERNANCE FOR NBFCS

In order to enable NBFCs to adopt best practices and greater transparency in their operations following
guidelines were proposed by RBI vide Circular dated 1dst July, 2013.

These Guidelines are for consideration of the Board of Directors of all Deposit taking NBFCs with
deposit size of Rs 20 crore and above and all non-deposit taking NBFCs with asset size of Rs 100 crore
and above (NBFC-NDSI). Listed NBFCs which are required to adhere to listing agreement and rules
framed by SEBI on Corporate Governance are also required to comply with SEBI prescriptions on
Corporate Governance.

Constitution of Audit Committee :
 An NBFC having assets of Rs. 50 crore and above
as per its last audited balance sheet is already
required to constitute an Audit Committee.
 Consisting of not less than three members of its
Board of Directors,
  NBFC-D with deposit size of Rs 20 crore may also
consider constituting an Audit Committee on
similar lines.

Constitution of Nomination Committee:  NBFCs with Asset size of Rs 100 crore and above
AND
 Deposit size of Rs 20 crore and above.

Constitution of Risk Management  Public Deposit of Rs.20 crore and above or

Committee:  Having an asset size of Rs.100 crore or above as
on the date of last audited balance sheet

Disclosure and transparency:  progress made in putting in place a progressive risk

management system, and risk management policy
and strategy followed;
 Conformity with corporate governance standards
viz. in composition of various committees, their
role and functions, periodicity of the meetings and
compliance with coverage and review functions,
etc.

Rotation of partners of the statutory  NBFCs with public deposits / deposits of Rs 50

auditors audit firm crore and above

Shall stipulate rotation of partners of audit firms

appointed for auditing the company. The partner/s of the
Chartered Accountant firm conducting the audit could be
rotated every three years so that same partner does not
conduct audit of the company continuously for more than
a period of three years. However, the partner so rotated
will be eligible for conducting the audit of the NBFC after
an interval of three years, if the NBFC, so decides.

CORPORATE GOVERNANCE GUIDELINES FOR INSURANCE COMPANIES

The Insurance Regulatory and Development Authority of India (IRDAI) issued Guidelines on Corporate
Governance for insurance companies vide circular dated 5th August, 2009. The Authority had also issued
separate guidelines for appointment/ reappointment and remuneration of MD/CEO/ WTD as well as other Key
Management Persons (KMPs) and also the Appointment of statutory auditors of insurers through various
circulars. The IRDAI revised the existing Guidelines in the light of changes brought in by the Companies Act,
2013.

These guidelines are applicable to all insurers granted registration by the Authority except:

 Reinsurance companies may not be required to have the Policyholders’ Protection Committee; and
 Branches of foreign reinsurers in India may not be required to constitute the Board and its mandatory
committees as indicated herein.

The guidelines address the various requirements broadly covering the following major structural elements of
Corporate Governance in insurance companies:-
 1. Governance Structure
The insurance companies presently could have different structures with the Board of Directors headed by a
Executive or Non-executive Chairman with distinct oversight responsibilities over the other Directors and Key
Management Persons. It is expected that whatever form is taken, the broader elements of good Corporate
Governance are present.

2. Board of Directors
a. Composition:
 The Insurance Act stipulates that the insurance companies in India would be public companies
and hence, would require a properly constituted Board.
 The size of the Board in addition to being compliant with legal requirements (where applicable),
should be consistent with scale, nature and complexity of business.
 Insurance companies should ensure that the Board comprises of competent and qualified
Directors to drive the strategies in a manner that would sustain growth and protect the interests
of the stakeholders.
 The Board of Directors is required to have a minimum of three “Independent Directors”.
However, this requirement is relaxed to ‘two’ independent directors, for the initial five years
from grant of Certificate of Registration to insurers. An independent Director shall fulfill all the
conditions specified under Section 149 of the Companies Act, 2013.
 In case the number of independent directors falls below the required minimum laid down, such
vacancy shall be filled up:
 Before the immediately following Board meeting or
 3 months from the date of such vacancy, whichever is later
 As required under Section 149 of the Companies Act, 2013, there shall be at least one Woman
Director on the Board of every Insurance company.

b. The Role and responsibility of the Board: The specific areas of responsibilities of the Board of insurers
are provided as under-
I. The Board should ensure that the Governance principles set for the insurer comply with all
relevant laws, regulations and other applicable codes of conduct.
II. The Board should set the following policies in consultation with the Management of the
Company.
 Define and periodically review the business strategy.
 Define the underwriting policy of the insurer.
 Define the insurer’s policy on appointments and qualification requirements for human resources
and ensure that the incentive structure does not encourage imprudent behaviour.

III. The Board should define and set the following standards:-
 Define the standards of business conduct and ethical behaviour for directors and senior
management.
 Define the standards to be maintained in policyholder servicing and in redressal of
grievances of policyholders.

IV. The Board would be responsible to provide guidance for implementation of business strategy
and review the same periodically.
V. As an integral part of proper implementation of the business strategy, the Board should take
action as under:-
  Ensure that all directions of IRDAI are submitted to the Board and the
recommendations are implemented as per the Board philosophy.
 Ensure that the company has put in place a robust compliance system for all applicable
laws and regulations.
 Prescribe requirements and frequency of reporting in respect of each of the above areas
of responsibility as may be decided by the Board.

c. Eligibility Criteria:
The Directors of insurers have to meet the “fit and proper” criteria. Currently, the fit and proper
requirements seek to ensure that the Director should not have been convicted or come under adverse
notice of the laws and regulations involving moral turpitude or of any professional body.
d. Disclosures about Meetings of the Board and its Committees:
Insurers shall ensure compliance with the provisions of the Companies Act, 2013 and the Secretarial
Standards issued by the ICSI from time to time as regards conduct of the meetings of the Board of
Directors and their committees. In addition to the above, all insurers shall disclose the following in the
Director’s Report:
 Number of meetings of the Board of Directors and Committees mandated under these
Guidelines, in the financial year;
 Details of the composition of the Board of Directors and Committees mandated, setting out
name, qualification, field of specialization, status of directorship held etc.
 Number of meetings attended by the Directors and members of the Committee;
 Details of the remuneration paid, if any, to all directors (including Independent Directors).

e. Control Functions:
Given the risks that an insurer takes in carrying out its operations, and the potential impact it has on its
business, it is important that the Board lays down the policy framework to put in place:
 robust and efficient mechanisms for the identification, assessment, quantification, control,
mitigation and monitoring of the risks;
 appropriate processes for ensuring compliance with the Board approved policy, and applicable
laws and regulations;
 appropriate internal controls to ensure that the risk management and compliance policies are
observed;

3. MANDATORY COMMITTEES OF THE BOARD

A. Audit Committee (mandatory):
Every Insurer shall constitute an Audit Committee as per Section 177 of the Companies Act, 2013 and
will play role provided as provided under the Act. As required under Section 177 of the Companies Act,
2013, the Audit Committee shall comprise of a minimum of three directors, majority of whom shall be
Independent Directors.
B. Investment Committee (mandatory):
The Board of every Insurer shall set up an Investment Committee comprising of at least two Non-
Executive Directors, the Chief Executive Officer, Chief of Finance, Chief of Investment, Chief Risk
Officer and, the Appointed Actuary. The responsibilities of the Committee to recommend:
 Investment policy and lay down the operational framework for the investment operations of the
insurer.

The policy should focus on a prudential Asset Liability Management (ALM) supported by robust
internal control systems.

C. Risk Management Committee (mandatory):

 It is now well recognized that the sound management of insurance in pursuit of development of a
strong risk management system and mitigation strategies, insurers shall set up a separate Risk
Management Committee to implement the company’s Risk Management Strategy. The risk management
function should be under the overall guidance and supervision of the Chief Risk Officer (CRO) with a
clearly defined role.
D. Policyholder Protection Committee (mandatory):
The Authority is mandated by statute to protect policyholders’ interests and therefore adoption of
sound and healthy market practices in terms of sales, marketing, advertisements, promotion, publicity,
redressal of customer grievances, consumer awareness and education is essential.

Such Committee shall be headed by a Non-Executive Director and shall include an

expert/representative of customers as an invitee to enable insurers to formulate policies and assess
compliance thereof.
E. Nomination and Remuneration Committee (mandatory):
The Nomination and Remuneration Committee shall be constituted in line with the provisions of
Section 178 of the Companies Act, 2013. Indian Insurance Companies which have constituted two
independent committees for Nomination and Remuneration separately may merge these two
Committees after seeking the Board approval, under intimation to the Authority, within a period of
180 days from the date of issue of these guidelines.
F. Corporate Social Responsibility Committee (‘CSR Committee’) (mandatory):
Section 135 of the Companies Act, 2013 requires constitution of a CSR Committee if certain conditions
as mentioned in the said Section are fulfilled. For Indian Insurance Companies, a CSR Committee is
required to be set up if the insurance company earns a Net Profit of Rs. 5 Crores or more during the
preceding financial year. In line with Section 135(5) of Companies Act, 2013, the Board of Directors of
the Company shall ensure that the Company spends not less than 2% of the three years’ average Net
Profits as defined above towards the CSR activities.

PROFITS COMMITTEE:
The Authority has issued IRDA (Non-Linked Insurance Products) Regulations 2013, which lay down the
framework about the With Profit Fund Management and Asset sharing, among other things. In terms of
these Regulations, every Insurer transacting life insurance business shall constitute a With Profits
Committee comprising of an Independent Director, the CEO, The Appointed Actuary and an
independent Actuary. The Committee shall meet as often as is required to transact the business and
carry out the functions of determining the following:
 The share of assets attributable to the policyholders
 The investment income attributable to the participating fund of policyholders
 The expenses allocated to the policyholders

The report of the With Profits Committee in respect of the above matters should be attached to the
Actuarial Report and Abstract furnished by the insurers to the Authority.

4. Role of Appointed Actuaries

IRDAI has brought out detailed Regulations on Appointed Actuary vide IRDA (Appointed Actuary)
Regulations, 2000, detailing the procedure for his appointment, qualifications, powers along with his
duties and obligations. The Regulations also stipulate that prior approval of the Authority shall be taken
for the appointment of the Appointed Actuary.

 A procedure for appointment of Appointed Actuary should be put in place.

 The Appointed Actuary should qualify and satisfy the ‘Fit & Proper’ criteria and other eligibility
conditions as mentioned in IRDA (Appointed Actuary) Regulations, 2000, as amended from
time to time.
  As soon as the Appointed Actuary realizes that the entity does not comply or is likely to fail in
complying with the requirements of solvency and other parameters of sound operations, he/she
shall inform the Board of the insurer. If no viable/acceptable action is taken by the Board, then
he/she has to inform the same to IRDAI.
 The Appointed Actuary shall provide professional advice or certification to the board with
regard to:-
 Financial condition testing
 Solvency margin requirements
 Appropriateness of premiums (and surrender value)
 Allocation of bonuses to with-profit insurance contracts
 Estimation of technical provisions in accordance with the valuation framework set up
by the insurer.

5. External Audit - Appointment of Statutory Auditors

The IRDAI (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations,
2002 empower the Authority to issue directions/guidelines on appointment, continuance or removal of auditors
of an insurer. These guidelines/directions may include prescriptions on qualifications and experience of
auditors, their rotation, period of appointment, etc. as may be deemed necessary by the Authority.

The Board should therefore ensure that the statutory auditors are compliant with the regulatory requirements
and there are no conflicts of interest in their appointment.

The auditors should possess the competence and integrity to alert the appropriate authorities promptly of any
event that could seriously affect the insurance company’s financial position.

6. Disclosure Requirements
In the meantime, it may be ensured by the Board that the information on the following, including the basis,
methods and assumptions on which the information is prepared and the impact of any changes therein are also
disclosed in the annual accounts:-
 Actual solvency margin details vis-à-vis the required margin.
 Description of the risk management architecture.
 Payments made to group entities from the Policyholders Funds.
 Elements of remuneration package(including incentives) of MD & CEO and all other directors and Key
Management Persons.
 Details of number of claims intimated, disposed off and pending with details of duration.
 Any other matters, which have material impact on the insurer’s financial position.

Where finalization of annual accounts extends beyond 90 days from the end of the Financial Year, the status on
disclosure in the financial statements required under this clause may be made within 15 days of adoption of
annual accounts by the Board of Directors of the Insurers.

7. Interaction with the Regulator

Effective corporate governance practices in the office of the insurance company will enable IRDAI to have
greater confidence in the work and judgment of its board, Key Management Persons and control functions. In
assessing the governance practices in place, the IRDAI would:

 Assess the fitness and propriety of board members;

 Monitor the performance of boards;
 Assess the quality of insurance company’s internal reporting, risk management, audit and control
functions;
 Evaluate the effects of the insurance company’s group structure on the governance strategies;

Assess the adequacy of governance processes in the area of crisis management and business continuity. The
IRDAI would bring to the attention of the Board and senior management, concerns which have been
detected by it through supervisory activities.

8. Whistle Blower Policy

Insurers are well advised to put in place a “whistle blower” policy, where-by mechanisms exist for
employees to raise concerns internally about possible irregularities, governance weaknesses, financial
reporting issues or other such matters. These could include employee reporting in confidence directly to
the Chairman of the Board or of a Committee of the Board or to the Statutory Auditor. The Policy
illustratively covers the following aspects:

 Awareness of the employees that such channels are available, how to use them and how their
report will be handled.
 Handling of the reports received confidentially, for independent assessment, investigation and
where necessary for taking appropriate follow-up actions.
 A robust anti-retaliation policy to protect employees who make reports in good faith.
 Briefing of the board of directors.

The appointed actuary and the statutory/internal auditors have the duty to ‘whistle blow’, i.e., to
report in a timely manner to the IRDAI if they are aware that the insurance company has failed to take
appropriate steps to rectify a matter which has a material adverse effect on its financial condition. This
would enable the IRDAI to take prompt action before policyholders’ interests are undermined.

Evaluation of Board of Directors including Independent Directors

As required under Schedule IV of the Companies Act, 2013, the independent directors shall meet at
least once in a year to evaluate the performance of other than independent Directors. Similarly, there
shall be an evaluation of the Independent Directors by the other members of the Board of Directors as
required in the Schedule.

STEWARDSHIP CODE FOR INSURERS IN INDIA

Stewardship Principles

S. No. Principles Guidance

1. Insurers should Stewardship activities include monitoring and engaging

formulate a policy on the
discharge of their
stewardship
responsibilities and
publicly disclose it.
2. Insurers should have a
clear policy on how they
manage conflicts of
interest in fulfilling their
stewardship
responsibilities and
publicly disclose it.
3. Insurers should monitor
their investee
companies.
4. Insurers should have a
clear policy on
with companies on matters such as strategy,
performance, risk, capital structure, and corporate
governance, including culture and remuneration.
Insurers should put in place, maintain and publicly
disclose a policy for identifying and managing conflicts
of interest with the aim of taking all reasonable steps
to put the interests of their client or beneficiary first
Insurers should have mechanisms for regular
monitoring of their investee companies in respect of
their performance, leadership effectiveness, succession
planning, corporate governance, reporting and other
parameters they consider important.
Insurers should set out the circumstances in which they
will actively intervene and regularly assess the
 intervention in their outcomes of doing so.
investee companies. The meetings should be held in a confidential manner
with the view to resolve the issue constructively. If
dissatisfied with the response of the investee company,
the insurer may decide to escalate the matter, in
accordance with the pre-defined policy.
5. Insurers should have a For issues that require larger engagement with the
clear policy for investee company, insurers may choose to act
collaboration with other collectively with other institutional investors in order to
institutional investors, safeguard the interests of their investors. For such
where required, to situations, the insurers should have a policy to guide
preserve the interests of their actions and extent of engagement.
the policyholders
(ultimate investors),
which should be
disclosed.
6. Insurers should have a Insurers should not just blindly support the board of
clear policy on voting the investee company but, instead, take their own
and disclosure of voting voting decisions to promote the overall growth of the
activity investee companies and, in turn, enhance the value of
their investors.
Insurers should disclose their approach to stock lending
and recalling lent stock.
7. Insurers should report In addition to the regular fulfilment of their
periodically on their stewardship activities, institutional investors should
stewardship activities. also provide a periodic report to their ultimate
beneficiaries (policyholders) of how they have
discharged their responsibilities, in a format which is
easy to understand.

Disclosure and Reporting:

All insurers shall furnish a report on an annual basis to the IRDAI, on the status of compliance with the
Stewardship Code. The status report, approved by the Board shall be endorsed by the Compliance
Officer and should be submitted on or before 30th June every year. The reporting should be done
under the principle of “comply or explain”, the reasons for deviation or non-compliance with the
Stewardship Principles should be provided in the report.

CORPORATE GOVERNANCE IN PUBLIC SECTOR ENTERPRISES

Department of Public Enterprises (DPE) is the nodal department for issuing the corporate governance
guidelines for the Public Sector Enterprises for both at center and state level. Since Government is the
major shareholder in Public Sector Undertakings (PSUs)/Central Public Sector Enterprises (CPSEs), it is
responsible to set the high standard of governance to be followed by these public sector enterprises. As
the government’s disinvestment strategy gathers momentum, there is a genuine need to improve the
levels of transparency, and accountability within PSUs.
For the purpose of DPE Guidelines on Corporate Governance, CPSEs have been categorised into two
groups, namely,

 Those listed on the Stock Exchanges;

 Those not listed on the Stock Exchanges.

CPSEs listed on Stock Exchanges: In so far as listed CPSEs are concerned, they have to follow the
SEBI (LODR) Regulations, 2015. In addition, they shall follow those provisions in these Guidelines which
 do not exist in the SEBI Guidelines and also do not contradict any of the provisions of the SEBI
Guidelines.
Unlisted CPSEs: Each CPSE should strive to institutionalize good Corporate Governance practices
broadly in conformity with the SEBI Guidelines. The listing of the non-listed CPSEs on the stock
exchanges may also be considered within a reasonable time frame to be set by the Administrative
Ministry concerned in consultation with the CPSEs concerned. The non-listed CPSEs shall follow the
Guidelines on Corporate Governance on a mandatory basis.

DPE guidelines on Corporate Governance provide following governance parameters:

 Board of Directors
 Audit Committee
 Remuneration Committee
 Subsidiary Companies
 Disclosures
 Report, Compliance and Schedule of Implementation.

Salient features of Guidelines on Corporate Governance for Central Public Sector Enterprises
2010:
a. Board of Directors:
Composition of Board of Directors: The Board of Directors of the company shall have an optimum
combination of Functional, Nominee and Independent Directors.
 Functional Directors (including CMD/MD): should not exceed 50% of the actual strength of the
Board.
 Nominee Directors: Appointed by Government/other CPSEs shall be restricted to a maximum of
two.
 Independent Directors: In case of a CPSE listed on the Stock Exchanges and whose Board of
Directors is headed by an Executive Chairman, the number of Independent Directors shall be
at least 50% of Board Members; and
in case of all other CPSEs (i.e. listed on Stock Exchange but without an Executive Chairman, or
not listed CPSEs), at least one-third of the Board Members should be Independent Directors.

Part-time Directors’ compensation and disclosures: All fees/compensation, if any, paid to part-time
Directors, including Independent Directors, shall be fixed by the Board of Directors subject to the
provisions in the DPE guidelines and the Companies Act, 2013.

Number of Board meetings:-

 The Board shall meet at least once in every three months and
 At least four such meetings shall be held every year.
 Further the time gap between any two meetings should not be more than three months.

Number of Directorship:
 A Director shall not be a member in more than 10 committees or
 Act as Chairman of more than five committees across all companies in which he is a Director.

Compliance of Laws to be reviewed:- The Board shall periodically review compliance reports of all laws
applicable to the company, prepared by the company as well as steps taken by the company to rectify
instances of non-compliances.
 Code of Conduct: The Board shall lay down a code of conduct for all Board members and senior
management of the company. The code of conduct shall be circulated and also posted on the website of
the company.

Risk Management: Enterprise risk management helps management in achieving CPSE’s performance
and profitability targets. It helps to ensure effective reporting and compliance with laws and
regulations, and helps avoid damage to the entity’s reputation and associated consequences.
The Board should ensure the integration and alignment of the risk management system with the
corporate and operational objectives and also that risk management is undertaken as a part of normal
business practice and not as a separate task at set times.

Training of Directors: The company concerned shall undertake training programme for its new Board
members (Functional, Government, Nominee and Independent) in the business model of the company
including risk profile of the business of company.
They shall also be imparted training on Corporate Governance, model code of business ethics and
conduct applicable for the respective Directors.

b. Audit Committee:
Qualified and Independent Audit
Committee:
Role of Audit Committee:
 The Audit Committee shall have minimum three
Directors as members.
 Two-thirds of the members of audit committee
shall be Independent Directors.
 The Chairman of the Audit Committee shall be an
Independent Director.
 All members of Audit Committee shall have
knowledge of financial matters of Company, and at
least one member shall have good knowledge of
accounting and related financial management
expertise.
 The Chairman of the Audit Committee shall be
present at Annual General Meeting to answer
shareholder queries.
 The Company Secretary shall act as the Secretary
to the Audit Committee.
 Oversight of the company’s financial reporting
process and the disclosure of its financial
information to ensure that the financial statement
is correct, sufficient and credible.
 Recommending to the Board the fixation of audit
fees.
 Approval of payment to statutory auditors for any
other services rendered by the statutory auditors.
 Reviewing, with the management, the quarterly
financial statements before submission to the
Board for approval.
 Reviewing, with the management, performance of
internal auditors and adequacy of the internal
control systems.
 Discussion with internal auditors and/or auditors
any significant findings and follow up there on.
 Review all related party transactions in the
company. For this purpose, the Audit Committee
may designate a member who shall be responsible
for reviewing related party transactions.
 Review with the independent auditor the co-

Powers of Audit Committee:
Meeting of Audit Committee
ordination of audit efforts to assure completeness
of coverage, reduction of redundant efforts, and the
effective use of all audit resources.
 Consider and review the following with the
management, internal auditor and the independent
auditor:
 Significant findings during the year,
including the status of previous audit
recommendations.
 Any difficulties encountered during audit
work including any restrictions on the
scope of activities or access to required
information.
 To investigate any activity within its terms of
reference.
 To seek information on and from any employee.
 To obtain outside legal or other professional advice,
subject to the approval of the Board of Directors.
 To secure attendance of outsiders with relevant
expertise, if it considers necessary.
 To protect whistle blowers.
 At least four times in a year and not more than
four months shall elapse between two meetings.

 The quorum shall be either two members or one

Review of information by Audit
Committee.
third of the members of the Audit Committee
whichever is greater, but a minimum of two
independent members must be present.
 Management discussion and analysis of financial
condition and results of operations;
 Statement of related party transactions submitted
by management;
 Management letters/letters of internal control
weaknesses issued by l the statutory auditors;
 Internal audit reports relating to internal control
weaknesses;
 The appointment and removal of the Chief Internal
Auditor shall be placed before the Audit Committee;

c. Remuneration Committee:
Each CPSE shall constitute a Remuneration Committee comprising of at least three Directors, all of
whom should be part-time Directors (i.e. Nominee Directors or Independent Directors). The
Committee should be headed by an Independent Director.
d. Subsidiary Companies:
 At least one Independent Director on the Board of Directors of the holding company shall be a
Director on the Board of Directors of its subsidiary company.
 The Audit Committee of the holding company shall also review the financial statements of its
subsidiary company.
 The minutes of the Board meetings of the subsidiary company shall be placed at the Board
meeting of the holding company.
e. Disclosures:
Transactions: A statement in summary form of transactions with related parties in the normal and
ordinary course of business shall be placed periodically before the Audit Committee.

Accounting Standards: Where in the preparation of financial statements, a treatment different from
that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial
statements, together with the management’s explanation in the Corporate Governance Report as to
why it believes such alternative treatment is more representative of the true and fair view of the
underlying business transaction.

Board Disclosures – Risk management:

 The company shall lay down procedures to inform Board members about the risk assessment
and minimization procedures. Procedure will be laid down for internal risk management also.
 The Board should implement policies and procedures which should include:
 staff responsibilities in relation to fraud prevention and identification
 Responsibility of fraud investigation once a fraud has been identified;
 Process of reporting on fraud related matters to management;
 Reporting and recording processes to be followed to record allegations of fraud
 Requirements of training to be conducted on fraud prevention and identification.
Remuneration of Directors:
 All pecuniary relationship or transactions of the part-time Directors vis-à-vis the company shall
be disclosed in the Annual Report.
 Further the following disclosures on the remuneration of Directors shall be made in the section
on the Corporate Governance of the Annual Report:
 All elements of remuneration package of all the directors i.e. salary, benefits, bonuses,
stock options, pension, etc.
 Details of fixed component and performance linked incentives, along with the
performance criteria.
Management:
As part of the Directors Report or as an addition thereto, a Management Discussion and Analysis Report
should form part of the Annual Report. This Management Discussion and Analysis should include
discussion on the following matters within the limits set by the company’s competitive position:
 Industry structure and developments,
 Strength and weakness
 Opportunities and Threats
 Segment–wise or product-wise performance
 Outlook
 Risks and concerns
 Internal control systems and their adequacy
 Discussion on financial performance with respect to operational performance
 Material developments in Human Resources, Industrial Relations front, including number of
people employed.
 Environmental Protection and Conservation, Technological conservation, Renewable energy
developments, Foreign Exchange conservation
 Corporate social responsibility.
Report on Corporate Governance:
There shall be a separate section on Corporate Governance in each Annual Report of company, with
details of compliance on Corporate Governance.

Compliance:
The company shall obtain a certificate from either the auditors or practicing Company Secretary
regarding compliance of conditions of Corporate Governance as stipulated in these Guidelines.
Schedule of implementation:
The CPSEs shall submit quarterly progress reports, within 15 days from the close of each quarter, in the
prescribed format to respective Administrative Ministries/ Departments.
 GUIDELINES ON CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY FOR
CENTRAL PUBLIC SECTOR ENTERPRISES (WITH EFFECT FROM 1ST APRIL, 2013)
After the enactment of the Companies Act 2013, all CPSEs shall have to comply with the provisions of
the Act and the CSR Rules.

The guidelines contain certain additional requirements as mentioned below:

1. It is mandatory for all profit making CPSEs to undertake CSR activities as per the provisions of the Act
and the CSR Rules. Even the CPSEs which are not covered under the eligibility criteria based on
threshold limits of net-worth, turnover, or net profit as specified by Section 135 (1) of the Act, but
which made profit in the preceding year, would also be required to take up CSR activities as specified
in the Act and the CSR Rules.
2. All CPSEs must adopt a CSR and Sustainability Policy specific to their company with the approval of the
Board of Directors.
3. It would be mandatory for all CPSEs which meet the criteria as laid down in Section 135(1) of the Act, to
spend at least 2% of the average net profits of the three immediately preceding financial years in
pursuance of their CSR activities as stipulated in the Act and the CSR Rules.
4. While selecting CSR activities / projects from the activities listed in Schedule VII of the Act, CPSEs
should give priority to the issues which are of foremost concern in the national development agenda,
like safe drinking water for all, provision of toilets especially for girls, health and sanitation, education,
etc.
5. As mentioned in the Act, CPSEs should give preference to the ‘local area’ in selecting the location of
their CSR activities.
6. After giving due preference to the local area, CPSEs may also undertake CSR activities anywhere in the
country.
7. Within the provisions of the Act, Schedule VII of the Act, and the CSR Rules, CPSEs are encouraged to
take up CSR activities / projects in collaboration with other CPSEs for greater social, economic and
environmental impact of their CSR activities/projects.
 SOME EXAMINATION QUESTIONS

1. What do you mean by the Corporate Governance? How the governance norms are
applicable in the banks.
2. Discuss the salient features of the Ganguly Committee Report applicable to Private
Sector Banks.
3. IRDA has issued the guidelines on Corporate Governance Norms for the Insurance
Companies. Please mention the salient features of it.
4. Public Sector Undertakings also have to adhere to the norms of the Corporate
Governance. What guidelines have been issued by the Ministry in this regard?
5. Comments on the Corporate Social Responsibility.
6. DPE has issued the guidelines on Corporate Governance for the CPSEs. Discuss in
brief.
 CHAPTER 3

Board Effectivenes

ROLE OF THE BOARD OF DIRECTORS

The role of Board in particular includes:

 providing direction for management;

 create a performance culture that drives value creation without exposing the company to excessive
risk of value destruction;
 make well-informed and high-quality decisions based on a clear line of sight into the business;
 create the right framework for helping directors meet their statutory duties under the Companies Act
2013, and/or other relevant statutory and regulatory regimes;
 being accountable, particularly to those that provide the company’s capital; and
 think carefully about its governance arrangements and embraces evaluation of their effectiveness.

TYPES OF DIRECTORS UNDER COMPANIES ACT 2013

Executive Non Executive Shadow Woman

Director Director Director Director

Small
Resident Independent Niminee
Shareholders
Director Director Director
Director

1. Executive Director :
The term executive director is usually used to describe a person who is both a member of the board and
who also has day to day responsibilities in respect of the affairs of the company. Executive directors
perform operational and strategic business functions such as:

 managing people
 looking after assets
 hiring and firing
 entering into contracts

Executive directors are employed by the company and paid a salary, so are protected by employment
law. Examples of executive directors are production director, finance director or managing director or
whole time director.

2. Non Executive Director:

Non executive directors are not in the employment of the company. They are the members of the
Board, who normally do not take part in the day-to-day implementation of the company policy. They
are generally appointed to provide the company with the benefits of professional expertise and
outside perspective to the board. They play an effective role in governance of listed companies, but
they may or may not be independent directors.
Therefore, one can opine that all the Directors except ‘Whole Time Director’ and “Managing Director’
shall be considered as Non- Executive Director.
 3. Shadow Director:
Shadow Director is a person who is not formally appointed as a director, but in accordance with whose
directions or instructions the directors of a company are accustomed to act. However, a person is not a
shadow director merely because the directors act on advice given by him in a professional capacity.

A Shadow Director is an “officer” within the definition of the terms in Section 2 (59) of the Companies
Act, 2013, as it includes, “any person in accordance with whose directions or instructions the Board of
Directors or any one or more of the Directors is or are accustomed to act”.
Section 2(60)(v) wherein, the meaning of “officer who is in default” includes within itself any person in
accordance with whose directions or instructions the Board of directors of the company usually acts.

4. Woman Director:
Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, prescribes the following
class of companies shall appoint at least one woman director:
 every listed company;
 every other public company having:
 Paid-up share capital of one hundred crore rupees or more; or (100 cr. or more)
 Turnover of three hundred crore rupees or more. (300 cr. Or more)

Regulation 17(i) of the SEBI (LODR) Regulations also requires that at least one woman director shall be
appointed on the board of all listed entities.

SEBI (LODR) (Amendment) Regulations, 2018 provides that the top listed 500 companies shall have at
least one independent woman director by 1 April 2019 and for the top listed 1000 entities by 1 April 2020.

5. Resident Director:
Section 149 (3) of the Act has provided for residence of a director in India as a compulsory i.e. every
company shall have at least one director who has stayed in India for a total period of not less than 182
days in the previous calendar year.

6. Independent Director:
Independent Directors play a pivotal role in maintaining a transparent working environment in the
corporate regime. Independent Directors constitute such category of Directors who are expected to
have impartial and objective judgment for the proper functioning of the company. Section 2(47) of the
Companies Act 2013 provides that “independent director” means an independent director referred to
in sub-section (6) of section 149.

7. Nominee Director:
A nominee director belongs to the category of non-executive director and is appointed on behalf of an
interested party. It is pertinent to mention here that there is a divergent view as to whether a nominee
director can be considered independent or not. Naresh Chandra Committee in its report stated that
‘nominee director’ will be excluded from the pool of directors in the determination of the number of
independent directors.
In other words, such a director will not feature either in the numerator or the denominator. Both SEBI
(LODR) Regulations, 2015 and section 149(6) of the Companies Act, 2013 specifically exclude nominee
director from being considered as Independent.

8. Small Shareholders Director:

According to Section 151 of the Companies Act, 2013 every listed company may have one director
elected by “small shareholders”.
For the purpose of this section, “small shareholder” means a shareholder holding shares of nominal
value of not more than twenty thousand rupees or such other sum as may be prescribed.
Rule 7 of companies act 2013 laid down the terms and conditions for appointment of Small
Shareholder’s Director. A listed company, may upon notice of not less than 1000 or one-tenth of the
 total number of small shareholders, whichever is lower, have a Small Shareholders’ Director elected by
the small shareholders. A listed company may suo moto (on its own accord) opt to have a director
representing small shareholders.
COMPOSITION AND STRUCTURE OF BOARD
The composition and structure of the Board as prescribed under the law is given hereunder:
Particulars Companies Act, 2013
Size of the Board Section 149(1) provides every
company shall have a Board of
Directors consisting of individuals as
directors and shall have –
 A minimum number of three
directors in the case of a
public company,
 Atleast two directors in the
case of a private company,
and
 Atleast one director in the
case of a One Person
Company; and
 A maximum of fifteen
directors provided that a
company may appoint more
than fifteen directors after
passing a special resolution.
Note: Maximum directors’ clause not
applicable to Government Company
and Section 8 Company.
SEBI (LODR) Regulations, 2015
 Regulation 17(1)(a) provides that
Board of directors shall have an
optimum combination of executive
and non-executive directors with at
least one woman director and not
less than fifty per cent. of the board
of directors shall comprise of non-
executive directors;
 The top listed 500 companies shall
have atleast one independent
woman director by 1 April 2019 and
for the top listed 1000 entities by 1
April 2020.
 Regulation 17(1)(c) provides the
board of directors of the top 1000
listed entities (with effect from April 1,
2019) and the top 2000 listed entities
(with effect from April 1, 2020) shall
comprise of not less than six
directors.
Board Composition Section 149(4) provides that every Regulation 17 (1) (b) provides that the
public listed company shall have at- composition of board of directors of thelisted
least one third of total number of entity shall be as follows:
directors as independent directors  where the chairperson of the board of
and Central Government may directors is a non-executive director,
prescribe the minimum number of at least one-third of the board of
independent directors in any class or directors shall comprise of
classes of companies. independent directors and
Note: Not applicable to Government
Company and IFSC Public Company  where the listed entity does not have
a regular non-executive chairperson,
Rule 4 of the Companies at least half of the board of directors
(Appointment and Qualification of shall comprise of independent
Directors) Rules, 2014 prescribes that directors:
the following class or classes of
companies shall have at least two Provided that where the regular non-
independent directors: executive chairperson is a promoter of the
 Public Companies having listed entity or is related to any promoter or
paid- up share capital of 10 person occupying management positions at
crore rupees or more; or the level of board of director or at one level
below the board of directors, at least half of
 Public Companies having the board of directors of the listed entity shall
turnover of 100 crore rupees consist of independent directors.
or more; or

 Public Companies which

have, in aggregate,
outstanding loans,
debentures and deposits,
exceeding 50 crore rupees.

The following classes of unlisted

public company shall not be covered
under sub-rule (1), namely:-.
 a joint venture;
 a wholly owned subsidiary;
 dormant company as defined
under section 455 of the
Act.”]
 Board Composition as per SEBI
LODR, 2015

Atleast 50% of Atleast One Women

If Chairperson is If Chairperson is not If Chairperson is Non-Executive Director and

Non-Executive a Non-Executive promoter of the listed entity or is related to
Director any promoter

at least 1/3rd of
the board of at least 50% of the at least 50% of the
board of directors board of directors
directors shall
shall comprise of shall comprise of
comprise of
independent independent
independent
directors directors
directors

SECTION 166 DUTIES OF THE DIRECTORS

1. Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.

2. A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members
as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of
environment.

3. A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise
independent judgment.

4. A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or
possibly may conflict, with the interest of the company.

5. A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an
amount equal to that gain to the company.

6. A director of a company shall not assign his office and any assignment so made shall be void.
7. If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall
not be less than one lakh rupees but which may extend to five lakh rupees.
 POWERS OF THE BOARD
As per Section 179(3) read with Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014, the Board of Directors of
a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the
Board, namely:

 to make calls on shareholders in respect of money unpaid on their shares;

 to authorise buy-back of securities under section 68;
 to issue securities, including debentures, whether in or outside India;
 to borrow monies; (5) to invest the funds of the company;
 to grant loans or give guarantee or provide security in respect of loans;
 to approve financial statement and the Board’s report;
 to diversify the business of the company;
 to approve amalgamation, merger or reconstruction;
 to take over a company or acquire a controlling or substantial stake in another company;
 to make political contributions;
 to appoint or remove key managerial personnel (KMP);
 to appoint internal auditors and secretarial auditor.

Section 180 of the Act imposes restrictions on the powers of the Board. It provides that the board can exercise the following
powers only with the consent of the company by special resolution:–
 to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the
company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings;
 to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;
 to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed
aggregate of its paid-up share capital and free reserves and securities premium, apart from temporary loans obtained from
the company’s bankers in the ordinary course of business;
 to remit, or give time for the repayment of, any debt due from a director.

The special resolution relating to borrowing money exceeding paid up capital and free reserves specify the total amount up
to which the money may be borrowed by Board.

INDEPENDENT DIRECTORS FOR BETTER BOARD EFFECTIVENESS

Independent directors are required because they perform the following important role:

 Balance the often conflicting interests of the stakeholders.

 Facilitate withstanding and countering pressures from owners.
 Fulfill a useful role in succession planning.
 Act as a coach, mentor and sounding Board for their full time colleagues.
 Provide independent judgment and wider perspectives.
Section 149(6) of Companies Act, 2013 defines independent director as below:
(1) Every listed public company shall have at least one-third of the total number of directors as independent
directors
Also refer SEBI LODR
AND
(a) the Public Companies having paid up share capital of ten crore rupees or more; or
(b) the Public Companies having turnover of one hundred crore rupees or more; or
(c) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits,
exceeding ޠy crore rupees: shall have atleast TWO INDEPENDENT DIRECTORS.
Explanation.--For the purposes of this sub-section, any fraction contained in such one-third number
shall be rounded off as one.

The following classes of unlisted public company shall not required to appoint independent director:-
a) A joint venture;
b) A wholly owned subsidiary; and
c) A dormant company as defined under section 455 of the ACT.

CRITERIA OF INDEPENDENT DIRECTOR

(2) An independent director in relation to a company, means a director other than a managing director or
a whole-time director or a nominee director,--
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
In case of Government Companies The opinion of Ministry or Department of the
Central Government which is administratively in charge of the Company, or, as the
case may be, the State Government shall be considered to determine integrity and
relevant expertise and experience for appointing Independent Director and not of the
Board of the Company.
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associatecompany;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate
company;
(c) who apart from receiving any remuneration, has or had no pecuniary relationship other than
Remuneration as such Director or having transaction not exceeding ten % of his total income or
such amount as may be prescribe with the company,its holding, subsidiary or associate company,
or their promoters, or directors, during the two immediately preceding financial years or during the
current financial year; (Not applicable to Government Companies)
(d) none of whose relatives —
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company
during the two immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of face value not exceeding
fiƒy lakh rupees or two percent, of the paid-up capital of the company, its holding, subsidiary or
associate company or such higher sum as may be prescribed;
 (ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or
directors, in excess of Rs. 50 lakhs at any time during the two immediately preceding financial
years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any
third person to the company, its holding, subsidiary or associate company or their promoters,
or directors of such holding company, for Rs. 50 lakhs at any time during the two immediately
preceding financial years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its
holding or associate company amounting to two percent or more of its gross turnover or total
income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii).
(e) who, neither himself nor any of his relatives--
(i) holds or has held the position of a key managerial personnel or is or has been employee of
the company or its holding, subsidiary or associate company in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed;

Provided that in case of a relative who is an employee , the restriction under this clause shall
not apply for his employment during preceding three financial years.

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of--

Required by Public Companies

All listed companies Unlisted companies

Fulfilling following criteria

Paid up Share Cap OR Turnover OR Loans

>= 10 Crores >=100 Crores >50 Crores

LOGIC : (Chota Company for be1er governance)

(Loro ka paisa uthaya hai)

Criteria for becoming an

Independent Director
 • A Director
• Managing Director
• Whole Time Director
• Nominee Director
• WHO IN THE OPINION OF BOARD IS A PERSON OF
INTEGRITY AND POSSESS RELEVANT EXPERTISE

The

• Is or was not a promoter

• Is not related to promoters or directors Its Its
Associate Holding

*6 KA CHAKRAVYUH Its
Subsidiary

Their Promoters and Directors as well

The
HIS HIMSELF HAS OR HAD

• Only receives remuneration Its Its

• In no pecuniary relationship with
• Exceeding 10% of Director’s Total Income Associate Holding

Its
*6 KA CHAKRAVYUH
Subsidiary

Last two immediately preceding

Financial Year or Current Year

Neither Himself nor his Relative Their Promoters and Directors as well
 1) HOLDS OR HAS HELD The
|
Position of KMP or Employee
(MD, WD, CS, CEO CFO etc.) Its Its
| Associate Holding
4 KA CHAKRAVYUH

Its
In any Three Financial Year
immediately preceding the Current Subsidiary
Financial Year

Neither Himself nor his Relative

2) IS OR BEEN
The
Employee, Proprietor or a Partner

Its Its
Audit Firm, Practicing Associate Holding
CS, Cost Auditors of Legal/Consulting Firm that
has transaction amounting
to 10% of GT with

4 KA CHAKRAVYUH Its
In any Three Financial Year immediately Subsidiary
preceding the Current Financial Year Company

Neither Himself nor his Relative

 The

2) HOLDS

Its Its
2% or more of voting power
of THE COMPANY Associate Holding

1 KA CHARAVYUH
Its
Subsidiary
IN THE CURRENT FINANCIAL YEAR ONLY

Neither Himself nor his Relative

2) IS CEO or Director of
The

NGO

Its Its
Receives 25% or more of its receipts from Associate Holding
OR

Holds 2% or more voting power of the COMPANY

Its
Subsidiary
6 KA CHARAVYUH

1 KA CHAKRAVYUH

IN THE CURRENT FINANCIAL

YEAR
SPECIAL CASE : PROMOTERS & DIRECTORS OF THE CO.

1 KA CHAKRAVYUH
For holding voting power in thecompany

4 KA CHAKRAVYUH
For holding any position in the company

CHAKRAVYUH LOGIC
 (A) a firm of auditors or company secretaries in practice or cost auditors of the company or
its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent. or more of the gross turnover
of such firm;
Provided that in case of a Relative who is an employee, the Restriction under this clause
shall not apply for his employment during Preceeding three financial years.
(iii) holds together with his relatives two per cent. or more of the total voting power of the
company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that
receives twenty-five per cent. or more of its receipts from the company, any of its promoters,
directors or its holding, subsidiary or associate company or that holds two per cent. or more of
the total voting power of the company; or
(g) who possesses such other qualifications as may be prescribed.

(7) Every independent director shall at the first meeting of the Board in which he participates as a director
and therea†er at the first meeting of the Board in every financial year or whenever there is any change
in the circumstances which may affect his status as an independent director, give a declaration that he
meets the criteria of independence as provided in sub-section (6).
This subsection shall not apply to a Section 8 company.
Explanation.--For the purposes of this section, “nominee director” means a director nominated by any
financial institution in pursuance of the provisions of any law for the time being in force, or of any
agreement, or appointed by any Government, or any other person to represent its interests.
(8) The company and independent directors shall abide by the provisions specified in Schedule IV.
(9) Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of
sections 197 and 198, an independent director shall not be entitled to any stock option and may receive
remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for
participation in the Board and other meetings and profit related commission as may be approved by the
members.

TENURE OF INDEPENDENT DIRECTOR:

(10) Subject to the provisions of section 152, an independent director shall hold office for a term up to 5
consecutive years on the Board of a company, but shall be eligible for re-appointment on passing of a
special resolution by the company and disclosure of such appointment in the Board’sreport.

COOLING OFF PERIOD (3 YEARS)

(11) Notwithstanding anything contained in sub-section (10), no independent director shall hold office for
more THAN 2 CONSECUTIVE TERMS, but such independent director shall be eligible for appointment
a†er the expiration of three years of ceasing to become an independent director:
Provided that an independent director shall not, during the said period of three years, be appointed in or be
associated with the company in any other capacity, either directly or indirectly.
Explanation.--For the purposes of sub-sections (10) and (11), any tenure of an independent director on the
date of commencement of this Act shall not be counted as a term under those sub-sections.
 Liability of Independent Director
(12) Notwithstanding anything contained in this Act,--
(a) an independent director;
(b) a non-executive director not being promoter or key managerial personnel, shall be held liable,
ONLY in respect of such acts of omission or commission by a company which had occurred with his
knowledge, a†ributable through Board processes, and with his consent or connivance or where he
had not acted diligently.
(13) The provisions of sub-sections (6) and (7) of section 152 in respect of retirement of directors by rotation
shall not be applicable to appointment of independent directors.

SCHEDULE
IV
CODE FOR INDEPENDENT DIRECTORS
The Code is a guide to professional conduct for independent directors. Adherence to these standards by
independentdirectors andfulfilment of their responsibilities in a professional and faithful manner willpromote
confidence of the investment community, particularly minority shareholders, regulators and companies in the
institution of independent directors.

I. GUIDELINES OF PROFESSIONAL CONDUCT:

An independent director shall:
(1) uphold ethical standards of integrity and probity;
(2) act objectively and constructively while exercising his duties;
(3) exercise his responsibilities in a bona fide manner in the interest of the company;
(4) devote sufficient time and a†ention to his professional obligations for informed and balanced
decision making;
(5) not allow any extraneous considerations that will vitiate his exercise of objective independent
judgment in the paramount interest of the company as a whole, while concurring in or dissenting
from the collective judgment of the Board in its decision making;
(6) not abuse his position to the detriment of the company or its shareholders or for the purpose of
gaining direct or indirect personal advantage or advantage for any associatedperson;
(7) refrain from any action that would lead to loss of his independence;
(8) where circumstances arise which make an independent director lose his independence, the
independent director must immediately inform the Board accordingly;
(9) assist the company in implementing the best corporate governance practices.

II. ROLE AND FUNCTIONS:

The independent directors shall:

(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues
of strategy, performance, risk management, resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and management;
(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the
 reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial controls and the
systems of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and
senior management and have a prime role in appointing and where necessary recommend removal
of executive directors, key managerial personnel and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between
management and shareholder’s interest.

III. DUTIES:
The independent directors shall--
(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and
familiarity with the company;
(2) seek appropriate clarification or amplification of information and, where necessary, take and follow
appropriate professional advice and opinion of outside experts at the expense of the company;
(3) strive to a†end all meetings of the Board of Directors and of the Board committees of which he is a
member;
(4) participate constructively and actively in the commi†ees of the Board in which they are chairpersons
or members;
(5) strive to a†end the general meetings of the company;
(6) where they have concerns about the running of the company or a proposed action, ensure that these
are addressed by the Board and, to the extent that they are not resolved, insist that their concerns
are recorded in the minutes of the Board meeting;
(7) keep themselves well informed about the company and the external environment in which it
operates;
(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
(9) pay sufficient a†ention and ensure that adequate deliberations are held before approving related
party transactions and assure themselves that the same are in the interest of the company;
(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and to
ensure that the interests of a person who uses such mechanism are not prejudicially affected on
account of such use;
(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s
code of conduct or ethics policy;
(12) acting within hisauthority, assist in protecting the legitimate interests of the company, shareholders
and its employees;
(13) not disclose confidential information, including commercial secrets, technologies, advertising and
sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly
approved by the Board or required by law.
IV. MANNER OF APPOINTMENT:
(1) Appointment process of independent directors shall be independent of the company management;
while selecting independent directors the Board shall ensure that there is appropriate balance of
 skills, experience and knowledge in the Board so as to enable the Board to discharge its functions and
duties effectively.
(2) The appointment of independent director(s) of the company shall be approved at the meeting of the
shareholders.
(3) The explanatory statement a†ached to the notice of the meeting for approving the appointment of
independent director shall include a statement that in the opinion of the Board, the independent
director proposed to be appointed fulfils the conditions specified in the Act and the rules made
thereunder and that the proposed director is independent of the management.
(4) The appointment of independent directors shall be formalised through a le†er of appointment,
which shall set out:

(a) the term of appointment;

(b) the expectation of the Board from the appointed director; the Board-level committee(s) in
which the director is expected to serve and its tasks;
(c) the fiduciary duties that come with such an appointment along with accompanying liabilities;
(d) provision for Directors and Officers (D and O) insurance, if any;
(e) the Code of Business Ethics that the company expects its directors and employees to follow;
(f) the list of actions that a director should not do while functioning as such in the company; and
(g) the remuneration, mentioning periodic fees, reimbursement of expenses for participation in
the Boards and other meetings and profit related commission, if any.
(5) The terms and conditions of appointment of independent directors shall be open for inspection at
the registered office of the company by any member during normal businesshours.
(6) The terms and conditions of appointment of independent directors shall also be posted on the
company’s website.
V. RE-APPOINTMENT:
The re-appointment of independent director shall be on the basis of report of performance evaluation.

VI. RESIGNATION OR REMOVAL:

(1)The resignation or removal of an independent director shall be in the same manner as is provided
in sections 168 and 169 of the Act.
(2) An independent director who resigns or is removed from the Board of the company shall be
replaced by a new independent director within 3 (three) months from the date of such resignation
or removal, as the case may be.
(3) Where the company fulfils the requirement of independent directors in its Board even without
filling the vacancy created by such resignation or removal, as the case may be, the requirement of
replacement by a new independent director shall not apply.
VII. SEPARATE MEETINGS:
(1) The independent directors of the company shall hold at least one meeting in a year, without the
a†endance of non-independent directors and members of management;
(2) All the independent directors of the company shall strive tobe present at such meeting;
(3) The meeting shall:
(a) review the performance of non-independent directors and the Board as a whole;
 (b) review the performance of the Chairperson of the company, taking into account the views of
executive directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between the company
management and the Board that is necessary for the Board to effectively and reasonably
perform their duties.

VIII. EVALUATION MECHANISM

(4) The performance evaluation of independent directors shall be done by the entire Board of Directors,
excluding the director being evaluated.
(5) On the basis of the report of performance evaluation, it shall be determined whether to extend or
continue the term of appointment of the independent director.

For listed companies -Refer class dictation as per clause Sebi LOD
Role of the lead  Acts as the principal liaison between the independent directors of
independent director the Board and the Chairman of the Board;
 Develops the agenda for and preside at executive sessions of the
Board’s independent directors;
 Advises the Chairman of the Board as to an appropriate schedule
for Board meetings, seeking to ensure that the independent
directors can perform their duties responsibly while not interfering
with the flow of Company operations;
 Approves with the Chairman of the Board the agenda for Board and
Board Committee meetings and the need for special meetings of
the Board;
 Advises the Chairman of the Board as to the quality, quantity and
timeliness of the information submitted by the Company’s
management that is necessary or appropriate for the independent
directors to effectively and responsibly perform their duties;
 Recommends to the Board the retention of advisors and
consultants who report directly to the Board;
 Assists the Board and Company officers in better ensuring
compliance with and implementation of the Governance Guidelines;
 Serves as Chairman of the Board when the Chairman is not
present; and
 Serves as a liaison for consultation and communication with
shareholders.

SEPARATION OF ROLE The benefits of separation of roles of Chairman and CEO can be:
OF CHAIRMAN AND
 Director Communication: A separate chairman provides a more
CHIEF EXECUTIVE
effective channel for the board to express its views on management
OFFICER
 Guidance: A separate chairman can provide the CEO with guidance
and feedback on his/her performance
 Shareholders’ interest: The chairman can focus on shareholder
interests, while the CEO manages the company
 Governance: A separate chairman allows the board to more
effectively fulfill its regulatory requirements
 Long-Term Outlook: Separating the position allows the chairman to
focus on the long-term strategy while the CEO focuses on short-
term profitability
 Succession Planning: A separate chairman can more effectively
concentrate on corporate succession plans.

SUCCESSION Some leading practices for board succession planning are:

Page 59
PLANNING  Using a skills matrix to proactively shape board composition that
incorporates strategic direction and opportunities, regulatory and
industry developments, challenges, and transformation
 Conducting robust annual performance evaluations, including
facilitation by an independent third party
 Establishing and enhancing written director qualification standards
that align with the company’s business and corporate strategy, and
including these standards in corporate governance policies and
bylaws as appropriate
 Reviewing evolving committee and board leadership needs,
including the time commitments required l Considering director
election results and engagement by investors regarding board
composition, independence, leadership and diversity
 Prioritizing an independent mindset on boards, including through
board diversity, to foster debate, challenge norms and invigorate
board oversight processes and strategy development
 Making sure mentoring and development opportunities are
available for incoming directors.

DIRECTORS TRAINING, Director Induction:

DEVELOPMENT AND
 Briefing papers
FAMILARISATION
 Internal visits
 Introductions

An induction programme should be available to enable new directors to

gain an understanding of:
 the company’s financial, strategic, operational and risk
management position
 the rights, duties and responsibilities of the directors
 the roles and responsibilities of senior executives
 the role of board committees.

An induction kit should be given to new directors which should contain the
following:

 Memorandum and Articles of Association with a summary of most

important provisions
 Brief history of the company
 Current business plan, market analysis and budgets
 Protocol, procedures and dress code for Board meetings, general
meetings, , staff social events, site visits etc including the

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 involvement of partners; l Press releases in the last one year
 copies of recent press cuttings and articles concerning the company
 Annual report for last three years
 Notes on agenda and Minutes of last six Board meetings
 Board’s meeting schedule and Board committee meeting schedule
 Description of Board procedures.

Director’s It is a good practice for boards to arrange for an ongoing updation of their
Development members with changes in governance, technologies, markets, products,
and so on through:

 Ongoing education
 Site visits
 Seminars; and
 Various short term and long term Courses.

Familiarisation Regulation 25(7) of SEBI (LODR) regulations, 2015 provides that the listed
Programme for entity shall familiarise the independent directors through various
Independent programmes about the listed entity, including the following:
Directors:
 nature of the industry in which the listed entity operates;
 business model of the listed entity;
 roles, rights, responsibilities of independent directors; and
 any other relevant information.

Schedule IV of the Companies Act 2013 also provides that the Independent
Directors shall undertake appropriate induction and regularly update and
refresh their skills, knowledge and familiarity with the company.

Requirements under 1. The Role of the Nominations and Remuneration Committee in

the Companies Act performance evaluation of directors:
2013 Section 178 (2): The Nomination and Remuneration Committee shall
identify persons who are qualified to become directors and who
may be appointed in senior management in accordance with the
criteria laid down, recommend to the Board their appointment and
removal and [shall specify the manner for effective evaluation of
performance of Board, its committees and individual directors to be
carried out either by the Board, by the Nomination and
Remuneration Committee or by an independent external agency
and review its implementation and compliance].

2. Independent Directors’ role in performance evaluation of Boards,

non-independent directors and Chairperson:
The independent directors are required to hold at least one meeting

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 in a year, without the attendance of non-independent directors and
members of the management and in that meeting they are required
to review the performance of
 the non-independent directors and
 the Board as whole; and
 also review the performance of the Chairperson of the
company, taking into account the views of the executive
and non-executive directors.

3. Performance evaluation of Independent Directors:

the Board of every listed company and every other public company
having paid- up share capital of twenty five crores or more
calculated at the end of the preceding financial year except
Government Companies has to do formal annual evaluation of the
 Board
 its committees and
 all individual directors.

The Board’s report of such companies must include a statement indicating

the manner & criteria of formal Board Evaluation.

Provisions under the SEBI (Listing Obligations and Disclosure

Requirements) Regulations, 2015 It also requires Boards to conduct an
annual performance evaluation and its disclosure in the annual report
through the following provisions:

 Regulation 17(10) mandates that entire board of directors shall do

the performance evaluation of independent directors, provided that
in the evaluation process, the directors who are subject to
evaluation shall not participate.
 Regulation 19(4) read with Part D of Schedule II - It provides that
the role of committee shall, inter-alia, include the following:
 formulation of criteria for evaluation of performance of
independent directors and the board of directors;
 whether to extend or continue the term of appointment of
the independent director, on the basis of the report of
performance evaluation of independent directors.

Frequency of Board Section 134(3)(p) provides that there has to be a formal annual evaluation
Evaluation of Board of its own performance and that of its committees and individual
directors. The Company may undertake annual evaluation either in
accordance with calendar year or financial year.

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Broad Evaluation As per the Companies Act 2013 or SEBI (Listing Obligations and Disclosure
framework and Requirements) Regulations, 2015, Board evaluation would generally include
parameters following:

 Evaluation of the Board as a whole

 Evaluation of the Committees
 Evaluation of Individual Directors
 Managing Director / Whole time Director / Executive
Director
 Independent Directors
 Non- executive Directors
 Evaluation of the Chairperson.

1. Evaluation of the Board as a whole:

The evaluation of the performance of the Boards is essentially an
assessment of how the Board has performed on following
parameters which determines the effectiveness of boards.
 Board Structure : its composition, constitution and diversity and
that of its Committees, competencies of the members, Board and
Committee charters, frequency of meetings, procedures;
 Dynamics and Functioning of the Board : annual Board calendar,
information availability, interactionsand communication with CEO
and senior executives, Board agenda, cohesiveness and the quality
of participation in Board meetings;
 Business Strategy Governance: Board’s role in company strategy;
 Financial Reporting Process, Internal Audit and Internal Controls:
The integrity and the robustness of the financial and other controls
regarding abusive related party transactions, vigil mechanism and
risk management;
 Monitoring Role: Monitoring of policies, strategy implementation
and systems;
 Supporting and Advisory Role; and
 The Chairperson’s Role.

EVALUATION OF THE The evaluation may be externally facilitated. The broad parameters of
COMMITTEES reviewing the performance of the Committees, inter alia, are:

 Discharge of its functions and duties as per its terms of reference;

 Process and procedures followed for discharging its functions;
 Effectiveness of suggestions and recommendations received;
 Size, structure and expertise of the Committee; and

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  Conduct of its meetings and procedures followed in this regard.

EVALUATION OF Evaluation of Managing Director / Whole time Director / Executive

INDIVIDUAL Director: The broad parameters for reviewing the performance of Managing
DIRECTOR(s) Director/ Executive Director are:

 Achievement of financial/business targets prescribed by the Board;

 Developing and managing / executing business plans, operational
plans, risk management, and financial affairs of the organization;
 Display of leadership qualities i.e. correctly anticipating business
trends, opportunities, and priorities affecting the Company’s
prosperity and operations;
 Development of policies, and strategic plans aligned with the vision
and mission of Company and which harmoniously balance the needs
of shareholders, clients, employees, and other stakeholders;
 Managing relationships with the Board, management team,
regulators, bankers, industry representatives and other
stakeholders.

Evaluation of The Nomination Committee shall lay down the evaluation criteria for
Independent performance evaluation of independent directors. The company should
Directors: disclose the criteria for performance evaluation, as laid down by the
Nomination Committee, in its Annual Report.

Major Factors for Evaluation:

 The quality of the issues that get raised, discussed and debated at
the meetings of the Board and its Committees.
 The guidance provided by the Board in the light of changing market
conditions and their impact on the organisation.
 The methodology adopted by the Board to solve issues referred to
them
 The effectiveness of the directions provided by the Board on the
issues discussed in meetings.

Parameters:

 Exercise of objective independent judgment in the best interest of

Company;
 Ability to contribute to and monitor corporate governance
practice; and

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  Adherence to the code of conduct for independent directors.
 Performance of the Board against the benchmark performance set.
 Overall value addition by the discussions taking place at the Board
meetings.

Evaluation of Non- The broad parameters for reviewing the performance of Non-executive
Executive Directors Directors are:

 Participation at the Board / Committee meetings;

 Commitment (including guidance provided to senior management
outside of Board/ Committee meetings);
 Effective deployment of knowledge and expertise;
 Effective management of relationship with stakeholders;
 Integrity and maintaining of confidentiality;
 Independence of behaviour and judgment; and
 Impact and influence.

EVALUATION OF The broad parameters for reviewing the performance of Chairperson of

CHAIRPERSON OF THE the Board are:
BOARD
 Managing relationship with the members of the Board and
management;
 Demonstration of leadership qualities;
 Relationship and communication within the Board;
 Providing ease of raising of issues and concerns by the Board
members; and
 Promoting constructive debate and effective decision making at the
board;
 Relationship and effectiveness of communication with the
shareholders and other stakeholders;
 Promoting shareholder confidence in the Board and
 Personal attributes i.e. Integrity, Honesty, Knowledge,etc.

BOARD A Company Secretary acts as a vital link between the company and its
EFFECTIVENESS AND Board of Directors, shareholders and other stakeholders and regulatory
THE ROLE OF THE authorities. A Company Secretary is a close confidante of the board and
COMPANY SECRETARY commands confidence of individual directors so as to ensure that the culture
of independence is promoted at the board and committee meetings and at
the level of individual directors.

Company Secretary:

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  acts as a vital link between the company and its Board of Directors,
shareholders and other stakeholders and regulatory authorities
 plays a key role in ensuring that the Board procedures are followed
and regularly reviewed
 provides the Board with guidance as to its duties, responsibilities
and powers under various laws, rules and regulations
 acts as a compliance officer as well as an in-house legal counsel to
advise the Board and the functional departments of the company on
various corporate, business, economic and tax laws
 is an important member of the corporate management team and
acts as conscience keeper of the company.

Regulation 6(1) of SEBI (LODR) Regulations, 2015 also provides that every
listed entity shall appoint a qualified company secretary as the compliance
officer.

According to Section 203(1) of the Act, it is mandatory for every listed

company and every other public company having a paid up share capital of
ten crore rupees or more to appoint a whole time Key Managerial
Personnel (KMP). Also a company other than a company covered above
which has a paid up share capital of ,five crore rupees or more, TEN CRORE
RUPEES OR MORE shall have a whole-time company secretary.

BOARD EFFECTIVENESS INDICATORS

Sample questions which can be used as a quick check for board effectiveness in any organization.
Are the majority of your board members independent from the organization?

 Does at least one member of the board have extensive experience in the industry of your
organization?
 Are directors offered continuing education in governance or a program of director
certification?
 Does each director display a keen interest or passion in the undertaking of the
organization?
 Do directors regularly attend both board and committee meetings?
 Are directors encouraged and supported when asking difficult or awkward questions of
management?
 Does the Chairman solicit views from each director specifically?
 Does the Chairman ask board members to refrain from expressing their personal views at
the outset of a discussion?
 Does the board review the risk identification and management system of the organization?
 Does the board approve the business plan and major expenditures?

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  Does the board work with the CEO and senior staff to develop and review the strategic
plan?

MODEL BOARD CHARTER

As a good practice companies may have a Board Charter which is intended as a tool to assist
directors in fulfilling their responsibilities as Board members. It sets out the respective roles,
responsibilities and authorities of the Board and of Management in the governance, management and
control of the organization. This charter should be read in conjunction with the Company’s
Memorandum and Articles.
A Model Charter may include the following:

 The Role of the Board

 The Role of the CEO
 The Role of the Company Secretary
 Directors Code of Conduct
 Conflicts of Interests
 Related Party transactions
 Board Members Qualifications, skills
 Board Meetings
 Delegation of Authority by the Board
 Role & power of Committees
 Committee Meetings
 Protocol for media contact and comment
 Hospitality and Gifts
 Board Evaluation
 Directors liability insurance
 Director Induction
 Non-Executive Director Remuneration
 Reimbursement of expenses.

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 SOME EXAMINATION QUESTIONS

1. Should the role of Chairman and CEO be separated?

2. “A good practice is to designate an independent director as a Lead Independent Director”.
Elucidate the role of Lead Independent Director according to Companies Act, 2013.
3. Write Short Notes on –
 Board Composition
 Training of Directors
 Board Charter
 Board Evaluation
 Shadow Director
 Succession Planning

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Page 69
Page 70
 CHAPTER 4
SECRETARIAL STANDARD 1

1. Applicability of SS-1  Every company is required to observe SS-1 except

 One Person Companies(OPC)having only one
Director on its Board and
 Such other class or class of companies which are
exempted by Central Government through
Exemptions shall be applicable to a Section 8
company provided it has not committed a default
in filing its Financial Statements or Annual Return
with the Registrar of Companies. However, Section
8 companies need to comply with the applicable
provisions of the Act relating to Board Meetings.

2. Who will convene the  Subject to Articles of Association of a company, Board

Board meeting? meeting may be convened by :
 Any Director of a company
 The Company Secretary or where there is no
Company Secretary, any person authorized by the
Board in this behalf, on the requisition of a Director.
 The Company Secretary cannot summon a Meeting
on his own, unless authorized by the Board of
Directors or the Articles to do so.
3. What are the modes  Notice in writing of every Meeting shall be given to every
of sending notice? Director by hand or by speed post or by registered post or
by facsimile or by e-mail or by any other electronic
means.[Courier excluded]
4. What are the  The Notice shall specify the serial number, day, date, time
essentials of notice? and full address of the venue of the Meeting.
 The Notice should specify the serial number given to the
Meeting.
 Day and date specified in the Notice should be as per the
Gregorian calendar.
 The time specified in the Notice should be the time of
commencement of the Meeting.
 Notice shall seek advance confirmation from directors as to
whether they will participate.
5. It is mandatory to give  The Notice of a Meeting shall be given even if meetings are
notice? held on predetermined dates or at pre-determined
intervals.
6. Whether any item not  Any item not included in the Agenda may be taken up for
mention in agenda consideration with the permission of the Chairman and
can be taken up for with the consent of a majority of the Directors present in
discussion? the Meeting.
7. What is the frequency  The company shall hold at least four Meetings of its Board

Page 71
 of Board meeting? in each Calendar Year with a maximum interval of one
hundred and twenty days between any two consecutive
Meetings.
8. What is the frequency  It shall be sufficient if a One Person Company, Small
of Board meeting for Company or Dormant Company holds one Meeting of the
Opc ,Small, Dormant Board in each half of a calendar year and the gap between
company? the two Meetings of the Board is not less than ninety days.
If a One Person Company, Small Company or Dormant
Company holds only two Meetings in a year, then the gap
between the two such Meetings should be minimum 90
days.
9. Whether SS1  A Meeting of Independent Directors is not a Meeting of the
applicable to Board or of a Committee of the Board. Therefore, provisions
Independent director of SS-1 shall not be applicable to such Meetings.
Meeting ?
10. Whether interested  An Interested Director should neither participate nor vote
director can in respect of an item in which he is interested, nor such
participate in Board Director be counted for Quorum in respect of such item.
meeting in case of However, such Director may be present in the Meeting
Private company . during discussions on such item. However, in case of a
private company, a Director shall be entitled to participate
in respect of such item after disclosure of his interest.
11. What are the  Unless otherwise stipulated in the Act or the Articles or
requirements of under any other law, the Quorum for Meetings of any
quorum for Committee constituted by the Board shall be as specified by
committees meeting? the Board. If no such Quorum is specified, the presence of
all the members of any such Committee is necessary to
form the Quorum.
12. Do the recording of  Persons who are present in a Meeting merely to provide
“Invitees” or “in administrative assistance to an Invitee or Director or
Attendance” Company Secretary should neither be treated as “Invitees”
mandatory? nor as “in Attendance”. The Chairman may use his
discretion in recording the presence of such persons.
13. When the director is  The office of a Director shall become vacant in case the
required to vacant the Director absents himself from all the Meetings of the Board
office? held during a period of twelve months with or without
seeking leave of absence of the Board.
14. What is the procedure  If no Chairman is elected by the Board, or if at any Meeting,
for Election of the Chairman is not present within five minutes after the
Chairman in the time appointed for holding the Meeting, the Directors
absence of elected present may choose one of their number to be Chairman of
chairman? the Meeting.
15. Can interested  If the Chairman is interested in an item of business, he shall
chairman continue to entrust the conduct of the proceedings in respect of such
chair in interested item to any Non-Interested Director with the consent of
matters? the majority of Directors present and resume the Chair

Page 72
 after that item of business has been transacted.
 However, in case of a private company, the Chairman may
continue to chair and participate in the Meeting after
disclosure of his interest. If the item of business is a related
party transaction, the Chairman shall not be present at the
Meeting, whether physically or through Electronic Mode,
during discussions and voting on such item.
16. Are minutes  Minutes need not be an exact transcript of the proceedings
exhaustive records at the Meeting.
?Who shall record it?  The Company Secretary shall record the proceedings of the
Meetings. Where there is no Company Secretary, any other
person duly authorised by the Board or by the Chairman in
this behalf shall record the proceedings.
 In case a Company Secretary is unable to attend a Meeting,
or in the absence of the Company Secretary, any other
person duly authorised by the Board or by the Chairman
may attend and record the proceedings of the Meeting.
17. Is it mandatory to  The Chairman has absolute discretion to exclude from the
record each and every Minutes, matters which in his opinion are or could
matter in minute reasonably be regarded as defamatory of any person,
book? irrelevant or immaterial to the proceedings or which are
detrimental to the interests of the company.
18. What is the procedure  Where any earlier Resolution(s) or decision is superseded or
for modification of modified, Minutes shall contain a specific reference to such
earlier resolution? earlier Resolution(s) or decision or state that the Resolution
is in supersession of all earlier Resolutions passed in that
regard.
19. Procedure for  The Chairman of the Board or in his absence, the Managing
resolution by Director or in their absence, any Director other than an
circulation? Interested Director, shall decide, before the draft
Resolution is circulated to all the Directors, whether the
approval of the Board for a particular business shall be
obtained by means of a Resolution by circulation.
 In case one-third of the total number of Directors for the
time being require the Resolution under circulation to be
decided at a Meeting, the Chairman shall put the
Resolution for consideration at a Meeting of the Board.
 Draft Resolution together with necessary documents is sent
to all directors, including interested director by hand /
speed post / courier / registered post/ e-mail / other
electronic means;
 Each resolution shall carry a serial number;
 Each Resolution shall be explained separately
containing:
 Details of proposal;
 Material facts;

Page 73
  Scope and implications;
 Nature of concern or interest of Directors;
 How a Director shall give his assent or dissent; and
 Time within which Directors shall signify his assent or
dissent
 By majority of directors entitled to vote. Directors shall
signify their assent or dissent by signing the Resolution to be
passed by circulation or by e-mail or any other electronic
means.
20. Mention the time limit  Within fifteen days from the date of the conclusion of the
for finalisation of Meeting of the Board or the Committee, the draft Minutes
minutes? thereof shall be circulated by hand or by speed post or by
registered post or by courier or by e-mail or by any other
recognised electronic means to all the members of the
Board or the Committee, as on the date of the Meeting, for
their comments.
 Only if Chairman is authorized by the Board, he has
discretionary power to consider the comments of any
director received after expiry of seven days from the date
of dispatch of draft minutes to them.
21. What is the procedure  Minutes, once entered in the Minutes Book, shall not be
for alteration of altered.
minutes once entered  Any alteration in the Minutes as entered shall be made
in the Minutes Book? only by way of express approval of the Board at its
subsequent Meeting at which the Minutes are noted by
the Board and
 The fact of such alteration shall be recorded in the Minutes
of such subsequent Meeting.
22. Who will for signing  Minutes of the Meeting of the Board shall be signed and
and dating of dated by the Chairman of the Meeting or by the Chairman
minutes? of the next Meeting.
23. Can proxies be  Proxies cannot be appointed to attend Board Meetings. As
appointed to attend the Act does not contain any provision conferring on the
board meeting? Directors the right to appoint a proxy to attend Board
Meetings.
24. Within what time  Minutes of the Board Meetings, if maintained
loose leaf of minutes in loose-leaf form, should be bound periodically
of board meeting be depending on the size and volume, coinciding with the
bound? financial year(s) of the company.
25. What is the time limit  Minutes of all meetings shall be preserved
for preservation of permanently in physical or in electronic form with
minutes and other timestamp.
records?
26. Can a BM be held at  REVISED SS-1 Board Meeting can be held at any time (even
any place? outside INDIA),any place and any day.
 Can be held even on national holiday.But adjourned board

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 meeting cannot be held on national holiday.
27. Proof of sending the  Proof of sending the notice and its delivery shall be
notice. maintained by the Company for a period of ATLEAST 3
YEARS.

Page 86
 SECTION 173 MEETING OF THE BOARD OF DIRECTORS
(1) Every company shall hold the first meeting of the Board of Directors WITHIN 30 DAYS of the
date of its incorporation and therea†er hold a minimum number of FOUR MEETINGS of its
Board of Directors every year in such a manner that not more than 120 DAYS shall intervene
between two consecutive meetings of the Board:
Provided that the Central Government may, by notification, direct that the provisions of this subsection
shall not apply in relation to any class or description of companies or shall apply subject to such exceptions,
modifications or conditions as may be specified in the notification.
Exception: Number of Board Meetings is different from OPC, Small Company, Dormant
Company – Sec 173(5)
Further in respect of Section 8 companies, this subsection shall apply only to the extent that the Board
of Directors of such companies shall hold at least one meeting within every six calendar months.
Frequency of Meetings as per Secretarial Standard-I:-
The Board should meet at least once in every three months, with a maximum interval of 120 days between
any two Meetings such that at least four Meetings are held in each year.
Meetings of Committees:-
Committees should meet at least as oGen as stipulated by the Board or as prescribed by any other authority.

X ltd. Conducted its BM on following dates, Is it complying with law?

1
1st Jan, 1st June, 1st July, 1st Dec.

(2) The participation of directors in a meeting of the Board may be either in person or through video
conferencing or other audio visual means, as may be prescribed, which are capable of recording and
recognising the participation of the directors and of recording and storing the proceedings of such
meetings along with date and time:
Meetings of Board through video conferencing or other audio visual means.- PROCEDURE:
A company shall comply with the following procedure, for convening and conducting the Board meetings
through video conferencing or other audio visual means.
D Every Company shall make necessary arrangements to avoid failure of video or audio visual
connection.
D The Chairperson of the meeting and the company secretary, zf any, shall take due and reasonable
care-
(a) to safeguard the integrity of the meeting by ensuring sufficient security and identification
procedures;
(b) to ensure availability of proper video conferencing or other audio visual equipment or facilities
for providing transmission of the communications for elective participation of the directors
and other authorised participants at the Board meeting;
(c) to record proceedings and prepare the minutes of the meeting;
(d) to store for safekeeping and marking the tape recording(s) or other electronic recording
mechanism as part of the records of the company at least before the time of completion of
audit of that particular year.

Page 87
 (e) to ensure that no person other than the concerned director are a1ending or have access
to the proceedings of the meeting through video conferencing mode or other audio visual
means; and
(f) to ensure that participants a1ending the meeting through audio visual means are able to
hear and see the other participants clearly during the course of the meeting:
Provided that the persons, who are differently abled, may make request to the Board to allow a
person to accompany him.

SEC 173 BOARD MEETING

IN USUAL CASES OPC AND OPC WITH SEC 8 IFSC PVT/PUBLIC

DORMANT ONE COMPANY COMPANY
COMPANY DIRECTOR

Minimum 4 Relaxation at first

Once in
board meeting in No board board meeting
every 6
a calendar year Atleast 2 board within 60 days of
meeting. months
meeting in a incorporation
with maximum
year. And therea†er
interval of 120 Minimum gap atleast 1 board
days between 2 between 2 meeting in each
board meetings. board meetings half of a calendar
is 90 days. year.

Note: When PRIVATE COMPANY ARE

there are more RECOGNISED AS START
than 2 board UP
meetings such
minimum gap
of 90 days is
irrelevant At least 1 in each half year & the
Co. AP between 2 BM is at least
90 days.

Can be held even on national holiday.

But adjourned board meeting cannot be held on national holiday.
Note :- REVISED SS-1 NOTICE OF ADJOURNED BOARD MEETING
Example:- Company incorporated on 01-10-2018, 1st Board meeting within 30 days

Page 88
 TIME, PLACE, DAY OF BOARD MEETING?
1
REVISED SS-1 Board Meeting can be held at any time (even outside INDIA),any place and any day.

Can be held even on national holiday.

But adjourned board meeting cannot be held on national holiday.
Note :- 1. First Board Meeting To Be Held Within 30 Days Of Incorporation.
2. REVISED SS-1 NOTICE OF ADJOURNED BOARD MEETING

IF DATE IS NOT
DECIDED AT THE
MEETING.

IF DATE IS Then 7 days fresh

DECIDED AT notice.
ORIGINAL BOARD
MEETING
Immediately a†er
the adjournment.

3. Proof of sending notice /agenda/notes /minutes and DELIEVERY shall be maintained by company
for atleast 3 years from the date of meeting.
4. Agenda-list of items.Act is silent about the despatch of agenda.
BUT REVISED SS-1 (1.10.2017) agenda ,notes to be sent to all directors by……….COURIER NOT
ALLOWED.

Who can a†end BM?

1
1. Directors
2. Persons invited by Directors about the proposed agenda.
Add EX 1 If BM is on 8th Aug .Notice should be given on 1st.Only date of BM excluded.
But if notice of BM is through post then two more days are excluded .If meeting is on 18th then
notice shall be given by 9th.

1st August, 2,3,4,5,6,7,8th August

Only Date of BM is excluded if notice is given by mail/fax.
If the date is given by post then two more dates excluded
9,10,11,12,13,14,15,16,17,18
X, X ,X

Page 89
 NOTICE
Q The notice of the meeting shall be sent to all the directors in accordance with the provisions of sub-
section (3) of section 173 of the Act. Provided further that where there is quorum in a Meeting through
Physical Presence of Directors, any other Director may participate through Video-Conferencing or other
Audio - Visual means. In such Meeting on any ma1er specified under first proviso.
Q The notice of the meeting shall inform the directors regarding the option available to them to participate
through video conferencing mode or other audio visual means, and shall provide all the necessary
information to enable the directors to participate through video conferencing mode or other audio visual
means.
Q A director intending to participate through video conferencing or audio visual means shall communicate
his intention to the Chairperson or the company secretary of the company.
Q If the director intends to participate through video conferencing or other audio visual means, he shall
give prior intimation to that effect sufficiently in advance so that company is able to make suitable
arrangements in this behalf provided that such declaration shall not debar him from participation in the
meeting in person in which case he shall intimate the company sufficiently in advance of his intention to
participate in person.
Q The director, who desire, to participate may intimate his intention of participation through the electronic
mode at the beginning of the calendar year and such declaration shall be valid for one calendar year.
Q In the absence of any intimation under clause (c), it shall be assumed that the director shall a1end the
meeting in person.
PROCEEDINGS DURING THE MEETING:
Q At the commencement of the meeting, a roll call shall be taken by the Chairperson when every director
participating through video conferencing or other audio visual means shall state, for the record, the
following namely:-
(a) name;
(b) the location from where he is participating;
(c) that he has received the agenda and all the relevant material for the meeting; and
(d) that no one other than the concerned director is a1ending or having access to the proceedings of the
meeting at the location mentioned in clause (b);
Q Afier the roll call, the Chairperson or the Company Secretary shall inform the Board about the names
of persons other than the directors who are present for the said meeting at the request or with the
permission of the Chairperson and confirm that the required quorum is complete.
Q Explanation. - A director participating in a meeting through video conferencing or other audio visual
means shall be counted for the purpose of quorum, unless he is to be excluded for any items of business
under any provisions of the Act or the rules. In RPT transaction a director cannot vote
Q The Chairperson shall ensure that the required quorum is present throughout the meeting. With respect to
every meeting conducted through video conferencing or other audio visual means authorised under these
rules, the scheduled venue of the meeting as set forth in the notice convening the meeting, shall be deemed
to be the place of the said meeting and all recordings of the proceedings at the meeting shall he deemed to
be made at such place. The statutory registers which are required to be placed in the Board meeting as per
the provisions of the Act shall be placed at the scheduled venue of the meeting and where such registers
are required to be signed by the directors, the same shall be deemed to have been signed by the directors
participating through electronic mode, if they have given their consent to this effect and it is so recorded
in the minutes of the meeting. Every participant shall identify himself for the record before speaking on
any item of business on the agenda.

Page 90
Q If a statement of a director in the meeting through video conferencing or other audio visual means is
interrupted or garbled, the Chairperson or Company Secretary shall request for a repeat or reiteration by
the Director.
Q If a motion is objected to and there is a need to put it to vote, the Chairperson shall call the roll and note
the vote of each director who shall identify himself while casting his vote.

From the commencement of the meeting and until the conclusion of such meeting, no person other than the
Chairperson, Directors, Company Secretary and any other person whose presence is required by the Board
shall be allowed access to the place where any director is a1ending the meeting either physically or through
video conferencing without the permission of the Board.
At the end of discussion on each agenda item, the Chairperson of the meeting shall announce the summary
of the decision taken on such item along with names of the directors, if any, who dissented from the decision
taken by majority.
Act is silent about the time of signing minutes of BM by the CHAIRMAN
MINUTES
The minutes shall disclose the particulars of the directors who aMended the meeting through video conferencing
or other audio visual means.
The drafi minutes of the meeting shall be circulated among all the directors WITHIN FIFTEEN DAYS OF THE
MEETING either in writing or in electronic mode as may be decided by the Board.
Every director who aMended the meeting, whether personally or through video conferencing or other audio
visual means, shall confirm or give his comments in writing, about the accuracy of recording of the proceedings
of that particular meeting in the draƒ minutes, WITHIN SEVEN DAYS OR SOME REASONABLE TIME AS DECIDED
BY THE BOARD, aƒer receipt of the draƒ minutes failing which his approval shall be presumed.
Aƒer completion of the meeting, the minutes shall be entered in the minute book as specified under section
118 of the Act and signed by the Chairperson.
Explanation - For the purposes of this rule, “video conferencing or other audio visual means” means audio-
visual electronic communication facility employed which enables all the persons participating in a meeting to
communicate concurrently with each other without an intermediary and to participate effectively in the meeting.
4 Physically
Example: 7 Directors present(quorum=5)
3 Video conferencing
In the meeting merger proposal was to be discussed.
Ans: Here Quorum should be physically present. Ma1ers can’t be discussed as physical quorum is not present.

MATTERS NOT TO DEALT THROUGH VIDEO CONFERENCE:

Provided that the Central Government may, by notification, specify such ma†ers which shall NOT BE DEALT
WITH IN A MEETING THROUGH VIDEO CONFERENCING or other audio visual means. The matters are as
follows:
Q the approval of the annual financial statements;
Q the approval of the Board’s report;
Q the approval of the prospectus;
Q the Audit Commi1ee Meetings for consideration of financial statement including consolidated, if any; and
Q the approval of the ma1er relating to amalgamation, merger, demerger, acquisition and takeover.
Provided futher that where there is a quorum in a meeting through physical presence of directors,any other
director may participate through video conferencing or other audio visual means in such meeting on any
ma1er specified under the first proviso.

Page 91
(3) A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every
director at his address registered with the company and such notice shall be sent by hand delivery or by
post or by electronic means:
Provided that a meeting of the Board may be called at shorter notice to transact urgent business subject
to the condition that AT LEAST ONE INDEPENDENT DIRECTOR, if any, shall be present at the meeting:
Provided further that in case of absence of independent directors from such a meeting of the Board,
decisions taken at such a meeting shall be circulated to all the directors and shall be final only on
ratification thereof by at least one independent director, if any.
Notice of a Board Meeting (Sec. 173 of the Companies Act, 2013)

Length of Notice (a) At least 7 days notice is required

A director may (b) Shorter notice is valid, if –
summon and the CS Urgent matter and Present in BM : At least 1 independent director, if any
on the requisition
of a director Otherwise
can convene a
Decision circulated to all the directors
board Meeting
aGer consulting
chairman/MD/WD and
in absence of the Decision ratified by at least
chairman. 1 independent director, if any

(4) Every officer of the company whose duty is to give notice under this section and who fails to do so shall
be liable to a penalty of twenty-five thousand rupees.
NUMBER OF MEETING FOR OPC, SMALL COMPANY, DORMANT COMPANY

(5) A One Person Company, small company and dormant company shall be deemed to have complied with the
provisions of this section if at least one meeting of the Board of Directors has been conducted in each half
of a calendar year and the gap between the two meetings is not less than ninety days:
Provided that nothing contained in this sub-section and in section 174 shall apply to One Person Company
in which there is only one director on its Board of Directors.
Ex :- Yash Raj Pvt. Ld. :- Paid up share cpaital - 40 lakhs. Turnover - 1 Crore.
Ans. :- This is a small Co. so compliance of section 173(5) will be there.
Case - 1. If OPC has only 1 director.
According to sec- 122, any board resolution to be placed in the board minutes and the date mentioned therein
shall be deemed to be date of board meeting.

QUORUM FOR MEETINGS OF BOARD

SECTION 174
(1) The quorum for a meeting of the Board of Directors of a company shall be one-third of its total strength
or two directors, whichever is HIGHER, and the participation of the directors by video conferencing or
by other audio visual means shall also be counted for the purposes of quorum under this sub-section.
Refer Numerical.
Also refer SEBI LODR

Page 91
(2) The continuing directors may act notwithstanding any vacancy in the Board; but, if and so long as their
number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing directors
or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or
of summoning a general meeting of the company and for no other purpose.
Quorum should be present throughout the meeting
Quorum for meeting of the Board of section 8 companies shall be: -
(a) 8 members
(b) 25% of total strength of the Board
Whichever is less
In any case, the quorum shall not be less than 2 members
Quorum of Producer Co. 1/3 OR 3 whichever is higher

DISINTERESTED QUORUM

(3) Where at any time the number of interested directors exceeds or is equal to two-thirds of the total
strength of the Board of Directors, the number of directors who are not interested directors and present
at the meeting, being not less than two, shall be the quorum during such time.
Explanation -For the purposes of this sub-section,“interested director” means a director within the
meaning of sub-section (2) of section 184.
(4) Where a meeting of the Board could not be held for want of quorum, then, unless the articles of the
company otherwise provide, the meeting shall automatically stand adjourned to the same day at the
same time and place in the next week or if that day is a national holiday, till the next succeeding day,
which is not a national holiday, at the same time and place.
Explanation.--For the purposes of this section,--
(a) any fraction of a number shall be rounded off as one;
(b) “total strength” shall not include directors whose places are vacant.
Total Directors = 12; All 12 came; Interested Directors = 9
1
Is Q present?
Q should be 1/3 × 12 OR 2
-higher
Actual Directors 12
Interested Directors 9
Disinterested 3 Not present
Exception:
If no. of ID ≥ 2/3 of total strength
Then remaining disinterested directors (at least 2) forms the quorum

BOARD MEETING

Time of Preparing M Time of Signing M who signs

GM 30 days 30 C/D duly authorized by BOD
BM 30 days No Time mentioned in Act C/C of succeeding meeting

Page 92
SECTION 175 PASSING OF RESOLUTION BY CIRCULATION

(1) No resolution shall be deemed to have been duly passed by the Board or by a
committee thereof by circulation, unless the resolution has been circulated in draG,
together with the necessary papers, if any, to all the directors, or members of the
commi†ee, as the case may be, at their addresses registered with the company in
India by hand delivery or by post or by courier, or through such electronic means
which may include E-mail or fax AND has been approved by a majority of the
directors or members, who are entitled to vote on the resolution:
Provided that, where not less than one-third of the total number of directors of
the company for the time being require that any resolution under circulation must
be decided at a meeting, the chairperson shall put the resolution to be decided at
a meeting of the Board.
(2) A resolution under sub-section (1) shall be noted at a subsequent meeting of the
Board or the committee thereof, as the case may be, and made part of the minutes
of such meeting.
Passing Resolution by Circulation (Sec. 175 of the Companies Act, 2013)

Conditions for passing a Circulate

resolution by circulation
(a) DraG resolution
(b) Necessary papers (if any)
Approval by majority
- to all the directors + of all the directors who
- at their registered address
- by hand delivery/post are entitled to vote
courier / e-mail / fax

Resolution not to be 1/3rd of the total number of directors Effect : Resolution shall not
passed by circulation require that the resolution be decided at BM be passed by circulation

Other points
• Noted
Resolution passed by Subsequent BM
• Included in minutes
circulation

DEFECTS IN APPOINTMENT OF DIRECTORS NOT TO INVALIDATE ACTIONS TAKEN

SECTION 176
No act done by a person as a director shall be deemed to be invalid, notwithstanding that
it was subsequently noticed that his appointment was invalid by reason of any defect
or disqualification or had terminated by virtue of any provision contained in this Act
or in the articles of the company:
Provided that nothing in this section shall be deemed to give validity to any act done by
the director a†er his appointment has been noticed by the company to be invalid or to
have terminated.

Note: Revised SS 1 The chairman of the BOD/ in absence of chairman any director (other than interested
director) shall decide that matter can be decided by CIRCULATION.

Page 93
Page 94
Page 95
 CHAPTER 5
Board Committees

A board committee is a small working group identified by the board, consisting of board members, for
the purpose of supporting the board’s work .Committees are usually formed as a means of improving
board effectiveness and efficiency, in areas where more fo
cused, specialized and technical discussions are required. Committees thus have an important role :

 To strengthen the governance arrangements of the company and support the Board in the
achievement of the strategic objectives of the company.
 To strengthen the role of the Board in strategic decision making and supports the role of
non-executive directors in challenging executive management actions.
 To maximise the value of the input from non-executive directors, given their limited time
commitment.
 To support the Board in fulfilling its role, given the nature and magnitude of the agenda.

COMMITTEE MANAGEMENT

1. Committees function in accordance with the terms of reference established by the board.
2. Committees may be standing committees; or ad-hoc committees that cease when the
activities are completed. Standing committees should be included in the articles or bylaws.
3. Committees recommend policy for approval by the entire board.
4. Committees make full use of board members’ expertise, time and commitment, and ensure
diversity of opinions on the board.
5. They do not supplant responsibility of each board member; they operate at the board level
and not the staff level.
6. Minutes should be recorded for all Committee meetings and final minutes are required to
be placed before the Board.

MANDATORY COMMITTEES OF THE BOARD

Companies Act, 2013 (for certain class of
companies)
 Audit Committee Nomination
 Nomination and
Remuneration Committee
Stakeholders
 Relationship Committee Corporate
 Social Responsibility Committee
SEBI (LODR) Regulations, 2015 (for listed
companies)
 Audit Committee
 Nomination and Remuneration Committee
 Stakeholders Relationship Committee
 Risk Management Committee

SECTION 177
AUDIT COMMITTEE
(1) The Board of Directors of every listed Public company and following companies, shall constitute an
Audit Committee.
The board of directors of every listed company and a company covered under rule 4 of the Companies
(Appointment and Qualification of Directors) Rules,2014 shall constitute an “Audit CommiMee” and a
“Nomination and Remuneration CommiMee ofs the Board”
If a company is not required to appoint independent director then no need to constitute such commiMee

Explanation. - The paid up share capital or turnover or outstanding loans, or borrowings or debentures or
deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into
account for the purposes of this rule.
NUMBER OF DIRECTORS REQUIRED
(2) The Audit Commi†ee shall consist of a minimum of three directors with independent directors forming
a majority:
Provided that majority of members of Audit Commi†ee including its Chairperson shall be persons with
ability to read and understand, the financial statement.
In listed companies at least 2/3rd will be independent directors as per Clause 49 of Listing Agreement.
Further Audit commi†ee in case of Section 8 companies can be formed without independent directors.
FUNCTIONS OF COMMITTEE
(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the
Board which shall, inter alia, include,--
(a) the recommendation for appointment, remuneration and terms of appointment of auditors of the
company;
(appointment and terms of appointment shall not be the part of terms of reference of audit
commi†ee in case of Government Companies)
(b) review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
(c) examination of the financial statement and the auditors’ report thereon;
(d) approval or any subsequent modification of transactions of the company with related parties;

X Ltd
41
unlisted public co. ID at least 2
Audit Committee — 5 directors Co is having 2 ID
149
177 here No. of ID
Should be 3 to Comply with 177
 Provided that the Audit Commi†ee may make omnibus approval for related party transactions
proposed to be entered into by the company subject to such conditions as may be prescribed.
Provided further that in case of transaction, other than transactions referred to in section 188 and
where Audit Commi†ee does not approve the transaction, it shall make its recommendations to
the Board;
Provided also that in case any transaction involving any amount not exceeding one crore rupees
is entered into by a director or officer of the company without obtaining the approval of the
Audit Commi†ee and it is not ratified by the Audit Commi†ee within three months from the date
of the transaction, such transaction shall be voidable at the option of the Audit Commi†ee and
if the transaction is with the related party to any director or is authorised by any other director,
the director concerned shall indemnify the company against any loss incurred by it :
Provided also that the provisions of this clause shall not apply to a transaction, other than a
transaction referred to in section 188, between a holding company and its wholly owned
subsidiary company.
(e) scrutiny of inter-corporate loans and investments;
(f) valuation of undertakings or assets of the company, wherever it is necessary;
(g) evaluation of internal financial controls and risk management systems;
(h) monitoring the end use of funds raised through public offers and related ma†ers.
(5) The Audit Commi†ee may call for the comments of the auditors about internal control systems, the
scope of audit, including the observations of the auditors and review of financial statement before their
submission to the Board and may also discuss any related issues with the internal and statutory auditors
and the management of the company.
(6) The Audit Committee shall have authority to investigate into any matter in relation to the items specified
in sub-section (4) or referred to it by the Board and for this purpose shall have power to obtain professional
advice from external sources and have full access to information contained in the records of the company.
(7) The auditors of a company and the key managerial personnel shall have a right to be heard in the
meetings of the Audit Commi†ee when it considers the auditor’s report but shall not have the right to
vote.
(8) The Board’s report under sub-section (3) of section 134 shall disclose the composition of an
Audit Commi†ee and where the Board had not accepted any recommendation of the Audit
Committee, the same shall be disclosed in such report along with the reasons therefor.
(9) Every listed company or the Companies which accept deposits from banks or the Companies the
public financial institutions in excess of fi†y crore rupees, shall ESTABLISH A VIGIL MECHANISM
FOR DIRECTORS AND EMPLOYEES to report genuine concerns in such manner as may be
prescribed.
(10) The vigil mechanism under sub-section (9) shall provide for adequate safeguards against
victimization of persons who use such mechanism and make provision for direct access to the chairperson
of the Audit Commi†ee in appropriate or exceptional cases:
Provided that the details of establishment of such mechanism shall be disclosed by the company on its
website, if any, and in the Board’s report.
SET UP OF VIGIL MECHANISM:
The companies which are required to constitute an audit commiMee shall oversee the vigil mechanism
through the Audit commiMee and if any of the members of the commi1ee have a conflict of interest in a given
case, they should recuse themselves and the others on the commi1ee would deal with the ma1er on hand.
In case of other companies the Board of directors shall nominate a director to play the role of audit commiMee
for the purpose of vigil mechanism to whom other directors and employees may report their concerns.
The vigil mechanism shall provide for adequate safeguards against victimization of employees and directors
who avail of the vigil mechanism and also provide for direct access to the Chairperson of the Audit CommiMee
or the director nominated to play the role of Audit Commi1ee, as the case may be, in exceptional cases.
In case of repeated frivolous complaints being filed by a director or an employee, the audit commi1ee or the
director nominated to play the role of audit commi1ee may take suitable action against the concerned
director or employee including reprimand.

Manners of Case 1 : The company is required to Case II : The company is not required to
Establishment of Vigil constitute an audit committee constitute an audit committee
Mechanism

Audit committee shall oversee Board shall nominate a director to play

the vigil mechanism the role of audit committee

If any member of Audit Committee has a • Such member shall rescue

conflict of interest in a given case himself
• Other member shall deal with
such matter

Requires frivolous complaints Suitable action including

reprimanding such person

Website, if any + Board’s Report

SECTION 178 NOMINATION AND REMUNERATION COMMITTEE AND STAKEHOLDERS RELATIONSHIP

COMMITTEE ( Not applicable to Section 8 companies)

(1) The Board of Directors of EVERY LISTED PUBLIC COMPANY and following companies, shall constitute the
Nomination and Remuneration Commi†ee consisting of THREE OR MORE NONEXECUTIVE DIRECTORS
out of which not less than one-half shall be independent directors :
The board of directors of every listed company and a company covered under rule 4 of the Companies
(Appointment and Qualification of Directors) Rules,2014 shall constitute an “Audit CommiMee” and a
“Nomination and Remuneration CommiMee ofs the Board”
 Explanation. - The paid up share capital or turnover or outstanding loans, or borrowings or debentures or
deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into
account for the purposes of this rule.
Provided that the chairperson of the company (whether executive or non-executive) may be appointed
as a member of the Nomination and Remuneration Commi†ee but shall not chair such Commi†ee.
FUNCTION OF COMMITTEE

(2) The Nomination and Remuneration Commi†ee shall identify persons who are qualified to become
directors and who may be appointed in senior management in accordance with the criteria laid down,
recommend to the Board their appointment and removal and shall specify the manner for effective
evaluation of performance of Board, its commi†ees and individual directors to be carried out either
by the Board, by the Nomination and Remuneration Commi†ee or by an independent external agency
and review its implementation and compliance.
(3) The Nomination and Remuneration Committee shall formulate the criteria for determining qualifications,
positive a†ributes and independence of a director and recommend to the Board a policy, relating to the
remuneration for the directors, key managerial personnel and other employees.
(4) The Nomination and Remuneration Committee shall, while formulating the policy under subsection (3)
ensure that--
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and
motivate directors of the quality required to run the company successfully;
(b) relationship of remuneration to performance is clear and meets appropriate performance
benchmarks; and
(c) remuneration to directors, key managerial personnel and senior management involves a balance
between fixed and incentive pay reflecting short and long-term performance objectives appropriate
to the working of the company and its goals:
Provided that such policy shall be placed on the website of the company, if any, and the salient
features of the policy and changes therein, if any, along with the web address of the policy, if any,
shall be disclosed in the Board’s report.
STAKEHOLDERS RELATIONSHIP COMMITTEE (>=1001)
(5) The Board of Directors of a company which consists of more than one thousand shareholders,
debenture-holders, deposit-holders and any other security holders at any time during a financial year
shall constitute a Stakeholders Relationship Commi†ee consisting of a chairperson who shall be a non-
executive director and such other members as may be decided by the Board.
(6) The Stakeholders Relationship Commi†ee shall consider and resolve the grievances of security holders
of the company.

No Min. No of directors specified

COMMITTEE CHAIRMAN TO ATTEND THE GENERAL MEETING(S)
(7) The chairperson of each of the commi†ees constituted under this section or, in his absence, any other
member of the committee authorised by him in this behalf shall a†end the general meetings of the
company.
(8) In case of any contravention of the provisions of section 177 and this section, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees
and every officer of the company who is in default shall be punishable with imprisonment for a term which
may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which
may extend to one lakh rupees, or with both:
Provided that inability to resolve or consider any grievance by the Stakeholder Relationship Committee
in good faith shall not constitute a contravention of this section.
Explanation – The expression “senior management means personnel of the company who are members
of its core management team excluding Board of Directors comprising all members of management one
level below the executive directors, including the functional heads.
As per SS-I all members of committee shall form Quorum of Meeting unless Board stipulates a different
requirements while forming the committee

COMMITTEE FORMATION UNDER THE ACT:

Listed Public Company Company
Company Paid up Turnover Loans or No. of Share-
Capital Borrowings holders or
Debenture
holders
10 crore or 100 crore > 50 crore > 1000
more or more
Nomination and Yes Yes Yes Yes No
remuneration Committee
(3 or more non-executive
Directors with majority
independent)
Audit Committee (minimum Yes Yes Yes Yes No
of 3 Directors with majority
Independent)
If listed co. then at least
2/3 ID
Stakeholder Relationship Yes No No No Yes
Committee (Chairman shall
be non executive Director)
 SECTION 179 POWERS OF BOARD

(1) The Board of Directors of a Company shall be entitled to exercise all such powers, and to do all such acts
and things, as the company is authorised to exercise and do :
Provided that in exercising such power or doing such act or thing, the Board shall be subject to the
provision contained in that behalf in this act, or in the memorandum or articles, or in any regulations not
inconsistent therewith and duly made thereunder, including regulations made by the company in general
meeting:
Provided further that the Board SHALL NOT EXERCISE ANY POWER or do any act or thing which is directed
or required, whether under this Act or by the memorandum or articles of the company or otherwise, to be
exercise or done by the company in general meeting
(2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which
would have been valid if that regulation had not been made.

POWERS EXERCISABLE ONLY AT BOARD MEETING:

(3) The Board of Directors of a company shall exercise the following powers on behalf of the company by
means of resolutions passed at meetings of the Board, namely:
(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s Report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) following matters also as prescribed by the Rules:
 to make political contributions;
 to appoint or remove key managerial personnel (KMP);
 to take note of appointment(s) or removal(s) of one level below the Key Management
Personnel; (NOW REMOVED)
 to appoint internal auditors and secretarial auditor;
 to take note of the disclosure of director’s interest and shareholding; (NOW REMOVED)
 to buy, sell investments held by the company (other than trade investments), constituting
five percent or more of the paid up share capital and free reserves of the investee company;
(NOW REMOVED)
 to invite or accept or renew public deposits and related ma†ers; (NOW REMOVED)
 to review or change the terms and conditions of public deposit; (NOW REMOVED)
  to approve quarterly, half yearly and annual financial statements or
financial results as the case may be. (NOW REMOVED)
Provided that ma†ers referred to in clauses (d), (e), (f), of subsection (3) may be
decided by the Board by circulation instead of at a meeting.
Provided that the Board may, by a resolution passed at a meeting, delegate to any
committee of directors, the managing director, the manager or any other principal
officer of the company or in the case of a branch office the company, the principal
officer of the branch office, the power specified in clauses (d) to
(f) on such conditions as it may specify:
Provided further that the acceptance by a banking company in the ordinary course
of its business of deposits of money from the public repayable on demand or
otherwise and withdrawable by cheque, draG, order or otherwise, or the placing of
monies on deposit by a banking company with another banking company on such
conditions as the Board may prescribe, shall not be deemed to be a borrowing of
monies or, as the case may be, a making of loans by a banking company within the
meaning of this section.

In case of Section 8 companies Power to borrow monies; power to invest the funds of the company;
and power to grant loans or give guarantee or provide security in respect of loans may be exercised by
the Board by way of circular resolution.
Explanation I.--Nothing in clause (d) shall apply to borrowings by a banking
company from other banking companies or from the Reserve Bank of India, the
State Bank of India or any other banks established by or under any Act.
Explanation II.--In respect of dealings between a company and its bankers, the
exercise by the company of the power specified in clause (d) shall mean the
arrangement made by the company with its bankers for the borrowing of money by
way of overdraG or cash credit or otherwise and not the actual day-to-day operation
on overdraG, cash credit or other accounts by means of which the arrangement so
made is actually availed of.
Nothing in this section shall be deemed to affect the right of the company in general meeting to impose
restrictions and conditions on the exercise b
CORPORATE SOCIAL RESPONSIBILITY COMMITTEE
Section 135 (1) read with rule 3 of Companies (Corporate Social Responsibility Policy) Rules, 2014,
mandates that every company which fulfils any of the following criteria during any of the three
preceding financial years shall constitute a CSR Committee –

 Companies having net worth of rupees five hundred crore or more, or

 Companies having turnover of rupees one thousand crore or more or
 Companies having a net profit of rupees five crore or more.

Composition of the Committee

 The CSR Committee shall consist of three or more directors.

 At least one director shall be an independent director.
 Companies (Meetings of Board and Powers) Rules, 2014, however, provides that-
 an unlisted public company or a private company covered under sub-section (1) of
section 135 which is not required to appoint an independent director, shall have its
CSR Committee without such director.
 a private company having only two directors on its Board shall constitute its CSR
Committee with two such directors:
 with respect to a foreign company covered under these rules, the CSR Committee
shall comprise of at least two persons of which one person shall be as specified
under clause (d) of subsection (1) of section 380 of the Act ,i.e. the person resident in
India authorized to accept on behalf of the company, service of process and any
notices or other documents and another person shall be nominated by the foreign
company.
 The composition of the CSR Committee shall be disclosed in the Board’s Report

Functions section 135 the functions of the CSR committee

include:
 formulating and recommending to the
Board, a CSR Policy which shall indicate
the activities to be undertaken by the
company as specified in Schedule VII;
 recommending the amount of
expenditure to be incurred on the CSR
activities.
 monitoring the Corporate Social
Responsibility Policy of the company from
time to time.
 Further the rules provide that the CSR
Committee shall institute a transparent
monitoring mechanism for
implementation of the CSR projects or
programs or activities undertaken by the
company.
RISK MANAGEMENT COMMITTEE
Under SEBI (LODR) Regulations, 2015 Regulation 21 of the SEBI (LODR) 2015 deals with the Risk
Management Committee and provides as under:
 The board of directors shall constitute a Risk Management Committee.
 The majority of members of Risk Management Committee shall consist of members of the
board of directors.
 The Chairperson of the Risk management committee shall be a member of the board of
directors and senior executives of the listed entity may be members of the committee.
 The risk management committee shall meet at least once in a year.
 The board of directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to the
committee and such other functions as it may deem fit (such function shall specifically cover
cyber security).
 The provisions of this regulation shall be applicable to top 500 listed entities, determined on
the basis of market capitalisation, as at the end of the immediate previous financial year.

OTHER COMMITTEES
1. Corporate Governance Committee: The Corporate Governance Committee is responsible for
considering and making recommendations to the Board concerning the appropriate size,
functions and needs of the Board. A company may constitute this Committee to develop and
recommend the board a set of corporate governance guidelines applicable to the company,
implement policies and processes relating to corporate governance, to review, periodically,
the corporate governance guidelines of the company.
2. Regulatory, Compliance & Government Affairs Committee:
 The primary objective of the Compliance Committee is to review, oversee, and
monitor.

 The Company’s compliance with applicable legal and regulatory requirements.

 The Company’s policies, programmes, and procedures to ensure compliance with
relevant laws, the Company’s Code of Conduct, and other relevant standards.

3. Science, Technology & Sustainability Committee:

 Monitor and review the overall strategy, direction and effectiveness of the
Company’s research and development.
 Serve as a resource and provide input, as needed, regarding the scientific and
technological aspects of product safety matters.
 Review the Company’s policies, programmes and practices on environment, health,
safety and sustainability.
4. Fraud Monitoring Committee: Although the fraud related aspects may be taken care of by
the Audit Committee, but in some companies which are in field of financial services, there
may be need of the separate fraud monitioring committee, which may take care of the
checks and balances and preventive measures in order to discourage the employees in their
modus operandi.
5. Performance Appraisal Review Committee: This committee periodically (say annually)
reviews the performance to Top Executives/ Key Managerial Person of the company as well
as the Directors of the company. It is just like the performance review of the each and every
employee, which happens in most of the organizations.
 SOME EXAMINATION QUESTIONS

1. What is the need and what are the advantages of Committee Management?
2. What are the mandatory committees of board?
3. A key element in Corporate Governance process of any organization is its Audit Cpmmittee.
4. Discuss in detail about nomination and remuneration committee.
5. Explain the importance of constitution of Risk Management Committee?
6. ICSI Recommendations to strengthen Corporate Governance framework.
7. Short notes:
 Fraud Monitoring Committee.
 Performance Appraisal Review Committee.
 CHAPTER 6

Corporate Policies and Disclosures

Importance of Some points highlighting the importance of corporate policies are given
corporate policies below-
 Policies are necessary to perform the business activities in a smooth
way.
 Corporate polices offer clear cut courses for achievement of
organizational goals.
 Corporate Policies present you with instructions and a platform for
making decisions.
 Policies promote delegation of the power of making decisions.
 Properly formulated corporate policies give a direction in which all
management pursuits are targeted.
 Policies provide steadiness to the action of the members of the
organization.
 It helps in dealing with the issues for optimal utilization of limited
resources.
 Sound policies aid in developing good public image of an
organization.
 They act as tool for co-ordination and control.

Policies under the Act, 2013

Companies Act 2013

Nomination
Risk Vigil
ans
CSR Policy Management Machanisam
Remunaration
Policy Policy
Policy

1. Corporate Social Responsibility Policy:

Section 135(4) of the Companies Act 2013, the Board of every
company required to constitue CSR Committee shall after taking into
account the recommendations made by the Corporate Social
Responsibility Committee, approve the Corporate Social
Responsibility Policy for the company and disclose contents of such
Policy in its report and also place it on the company’s website, and
ensure that the activities as are included in Corporate Social
 Responsibility Policy of the company are undertaken by the company.
The CSR Policy of the company shall, inter-alia, include the following
namely:-
 A list of CSR projects or programs which a company plans to
undertake specifying modalities of execution of such project
or programs and implementation schedules for the same
 Monitoring process of such projects or programs
 A clause specifying that the surplus arising out of the CSR
projects or programs or activities shall not form part of the
business profit of the company.

Activities which may be included by companies in their Corporate Social

Responsibility Policies are activities relating to:(Schedule VII)

 Eradicating hunger, poverty and malnutrition, promoting health care

including preventive health care and sanitation including contribution
to the Swach Bharat Kosh set-up by the Central Government for the
promotion of sanitation and making available safe drinking water.
 promoting education, including special education and employment
enhancing vocation skills especially among children, women, elderly
and the differently abled and livelihood enhancement projects.
 promoting gender equality, empowering women, setting up homes
and hostels for women and orphans; setting up old age homes, day
care centres and such other facilities for senior citizens and measures
for reducing inequalities faced by socially and economically backward
groups.
 ensuring environmental sustainability, ecological balance, protection
of flora and fauna, animal welfare, agroforestry, conservation of
natural resources and maintaining quality of soil, air and water
including contribution to the Clean Ganga Fund set-up by the Central
Government for rejuvenation of river Ganga.
 protection of national heritage, art and culture including restoration
of buildings and sites of historical importance and works of art;
setting up public libraries; promotion and development of traditional
art and handicrafts;
 measures for the benefit of armed forces veterans, war widows and
their dependents;
 training to promote rural sports, nationally recognised sports,
paralympic sports and olympic sports.
 contribution to the prime minister’s national relief fund or any other
fund set up by the central govt. for socio economic development and
 relief and welfare of the schedule caste, tribes, other backward
classes, minorities and women;
 contributions or funds provided to technology incubators located
within academic institutions which are approved by the central govt.
 rural development projects.
 slum area development.

2. Risk Management Policy

Section 134 (3) (n) of the Companies Act 2013, provides that a
statement indicating development and implementation of a risk
management policy for the company including identification therein
of elements of risk, if any, which in the opinion of the Board may
threaten the existence of the company should be included in the
report by its Board of Directors.

3. Vigil Mechanism Policy

Section 177 (10) of the Companies Act 2013 provides that the vigil
mechanism under sub-section (9) shall provide for adequate
safeguards against victimisation of persons who use such
mechanism and make provision for direct access to the chairperson
of the Audit Committee in appropriate or exceptional cases and the
details of establishment of such mechanism shall be disclosed by the
company on its website, if any, and in the Board’s report.

4. Nomination and Remuneration policy

Section 178 (3) and (4) of the Companies Act 2013 provides that the
Nomination and Remuneration Committee shall formulate the
criteria for determining qualifications, positive attributes and
independence of a director and recommend to the Board a policy,
relating to the remuneration for the directors, key managerial
personnel and other employees.

 the level and composition of remuneration is reasonable and

sufficient to attract, retain and motivate directors of the quality
required to run the company successfully;
 relationship of remuneration to performance is clear and meets
appropriate performance benchmarks; and
 remuneration to directors, key managerial personnel and senior
management involves a balance between fixed and incentive pay
reflecting short and long-term performance objectives appropriate
.to the working of the company and its goals:
Policies under the 1. Risk policy: The listed entity shall have a risk policy which shall be
SEBI (LODR), reviewed and guided by the board of directors. [Regulation
Regulations, 2015 4(2)(f)(ii)(1)]
2. Policy for preservation of documents: The listed entity shall have a
policy for preservation of documents, approved by its board of
directors, classifying them in at least two categories as follows-
 documents whose preservation shall be permanent in
nature ;
 documents with preservation period of not less than eight
years after completion of the relevant transactions. The
documents may be preserved in electronic mode.
[Regulation 9]
3. Archival Policy : The listed entities would identify all the documents
which need to be preserved under various regulations relating to
securities laws and then develop a suitable archival policy. According
to Section 2 (zf) of Lising Regulations “securities laws” covers the
following
 The Listing regulations
 The Securities Contracts (Regulation) Act, 1956,
 The Depositories Act, 1996,

The provisions of the Companies Act, 1956 and Companies Act, 2013,
and the rules, regulations, circulars or guidelines made thereunder.
4. Policy for Determining ‘Material’ Subsidiary: “Material subsidiary”
shall mean a subsidiary, whose income or net worth exceeds 20% of
the consolidated income or net worth respectively, of the listed
entity and its subsidiaries in the immediately preceding accounting
year. The listed entity shall formulate a policy for determining
‘material’ subsidiary. [Regulation 16(2)(c)]
5. Policy on Materiality of Related Party Transactions: A transaction
with a related party shall be considered material if the transaction(s)
to be entered into individually or taken together with previous
transactions during a financial year, exceeds ten percent of the
annual consolidated turnover of the listed entity as per the last
audited financial statements of the listed entity. The listed entity
shall formulate a policy on materiality of related party transactions
and on dealing with related party transactions. [Regulation 23(1)]
6. Policy for determination of materiality of events: The listed entity
shall frame a policy for determination of materiality, duly approved
by its board of directors, which shall be disclosed on its website. The
 policy shall be based on the following criteria for determination of
materiality of events/ information:
 The omission of an event or information, which is likely to
result in discontinuity or alteration of event or information
already available publicly; or
 The omission of an event or information is likely to result in
significant market reaction if the said omission came to light
at a later date;
 In case where the criteria specified in sub-clauses (a) and (b)
are not applicable, an event/ information may be treated as
being material if in the opinion of the board of directors of
listed entity, the event / information is considered material.
7. Whistle Blower Policy: The listed entity shall formulate a vigil
mechanism for directors and employees to report genuine concerns
under which they can have direct access to the chairperson of the
audit committee in appropriate or exceptional cases and formulate
and disclose whistle blower policy. [Regulation 22 and 46 (2) (e)]
8. Policy relating to the remuneration of the directors, key managerial
personnel and other employees: The listed entity shall formulate a
policy on the remuneration of the directors, key managerial
personnel and other employees. [Part- D, Schedule II (1)]
9. Policy on board diversity: The listed entity shall formulate a policy on
diversity of board of directors is mentioned as a role of nomination
and remuneration committee. [Part- D, Schedule II (3)]
10. Dividend Distribution Policy: Regulation 43A provides that-
 The top five hundred listed entities based on market
capitalization (calculated as on March 31 of every financial
year) shall formulate a dividend distribution policy which
shall be disclosed in their annual reports and on their
websites.
 The dividend distribution policy shall include the following
parameters:
 the circumstances under which the shareholders of
the listed entities may or may not expect dividend;
 the financial parameters that shall be considered
while declaring dividend;
 internal and external factors that shall be
considered for declaration of dividend;
 policy as to how the retained earnings shall be
utilized; and
  parameters that shall be adopted with regard to
various classes of shares:

If the listed entity proposes to declare dividend on the basis of parameters

in addition to clauses (a) to (e) or proposes to change such additional
parameters or the dividend distribution policy contained in any of the
parameters, it shall disclose such changes along with the rationale for the
same in its annual report and on its website.
The listed entities other than top five hundred listed entities based on
market capitalization may disclose their dividend distribution policies on a
voluntary basis in their annual reports and on their websites.

POLICIES UNDER 1. Insider Trading Policy;

OTHER LAWS AND 2. Policy for prevention of sexual harassment at workplace;
VOLUNTARY POLICIES 3. Voluntary Policies: In addition to above, the companies may also
formulate following policies:
 Code of business conduct & Ethics
 Ethics policy
 Information security policy
 Health and safety policy
 Gender diversity policy
 Environmental policy
 Policy on investor relations
 Quality policy
 Social accountability policy
 Communication policy
 Investment and cash policy

SECTION 135(3)(A) The Central Government many prescribe an abridged Board’s report, for
the purpose of compliance with this section by
Section 134 FINANCIAL STATEMENT, BOARD’S REPORT, ETC.

Core areas Provisions

Signing Of The 1) The financial statement, including consolidated
Financial financial statement, if any, shall be :-
Statements  shall be approved by the Board of Directors
before they are signed on behalf of the
Board by
 the chairperson of the company where he is
authorised by the Board or
 by two directors out of which one shall be
managing director, if any, and the Chief
 Executive Officer, the Chief Financial Officer
and the company secretary of the company,
wherever they are appointed, or in the case
of One Person Company, only by one
director, for submission to the auditor for his
report thereon.
Auditor`S 2) The auditors’ report shall be attached to every
Report financial statement.
Attached To
Financial
Statements
Boards Report 3) & 4) There shall be attached to statements laid
before a company in general meeting, a report by its
Board of Directors, which shall include—
a) ANNUAL RETURN:- will be the web address if
,any,where annual return referred to in
section 92(3) has been placed.
b) Number of BM:- number of meetings of the
Board
c) DRS:- Directors’ Responsibility Statement;
(ca) details in respect of frauds reported by
auditors under sub-section (12) of section 143
other than those which are reportable to the
Central Government
CA )FRAUD REPORTING:- details in respect of
frauds reported by auditors under sub-section
(12) of section 143 other than those which are
reportable to the Central Government.
d) INDEPENDENCE DECLARATION :- a statement
on declaration given by independent
directors under sub-section (6) of section
149;
e) NOMINATION & REMUNERATION
COMMITTEE:- in case of a company covered
under sub-section (1) of section 178,
company’s policy on directors’ appointment
and remuneration including criteria for
determining qualifications, positive attributes,
independence of a director and other matters
provided under sub-section (3) of section 178;
(Not Applicable to Government Companies)
f) EXPLANATIONS ON AUDITORS
QUALIFICATION:- explanations or comments
by the Board on every qualification,
reservation or adverse remark or disclaimer
made—
  by the auditor in his report; and
 by the company secretary in practice
in his secretarial audit report;
g) INTER CORPORATE LOANS AND
INVESTMENTS :- particulars of loans,
guarantees or investments under section
186;
h) section 188 in the prescribed form AOC 2;

Core areas Provisions

i) RELATED PARTY TRANSACTIONS:- particulars of
contracts or arrangements with related parties
referred to in sub-section (1) of section 188 in
the prescribed form AOC 2;
j) COMPANY AFFAIRS:- the state of the company’s
affairs;
k) TRANSFER TO RESERVES:- the amounts, if any,
which it proposes to carry to any reserves;
l) DIVIDEND:- the amount, if any, which it
recommends should be paid by way of dividend;
m) EVENTS OCCURING AFTER BALANCE SHEET DATE
:- material changes and commitments, if any,
affecting the financial position of the company
which have occurred between the end of the
financial year of the company to which the
financial statements relate and the date of the
report
n) ENERGY ,TECHNOLOGY ;FOREX :- the
conservation of energy, technology absorption,
foreign exchange earnings and outgo, in such
manner as prescribed below;
o) RISK MANAGEMENT POLICY:- a statement
indicating development and implementation of a
risk management policy for the company
including identification therein of elements of
risk, if any, which in the opinion of the Board
may threaten the existence of the company;
p) CSR:-the details about the policy developed and
implemented by the company on corporate
social responsibility initiatives taken during the
year;
q) PERFORMANCE EVALUATION OF BOD &
DIRECTORS:- in case of a listed company and
every other public company having paid-up
share capital of 25 Crore, a statement indicating
the manner in which formal annual evaluation
 of the performance of Board its committees and
of individual directors has been made;
(Not Applicable to Government Companies)
such other In addition to the information and details specified in
matters as sub-rule (4), the report of the Board shall also contain –
prescribed I. the financial summary or highlights;
below. II. the change in the nature of business, if any;
III. the details of directors or key managerial
personnel who were appointed or have resigned
during the year
IV. the names of companies which have become or
ceased to be its Subsidiaries, joint ventures or
associate companies during the year;
V. the details relating to deposits, covered under
Chapter V of the Act,-
a) accepted during the year;
b) remained unpaid or unclaimed as at the
end of the year;
c) whether there has been any default in
repayment of deposits or payment of
interest thereon during the year and if
so, number of such cases and the total
amount involved-
 at the beginning of the year;
 maximum during the year;
 at the end of the year;
VI. the details of deposits which are not in
compliance with the requirements of Chapter V
of the Act;
VII. the details of significant and material orders
passed by the regulators or courts or tribunals
impacting the going concern status and
company’s operations in future;
VIII. the details in respect of adequacy of internal
financial controls with reference to the Financial
Statements
Provided that where disclosures referred to in this sub-
section have been included in the financial statements,
such disclosures shall be referred to instead of being
repeated in the Board’s report;
Provided further that where the policy referred to in
clause (e) or clause (o) is made available on company’s
website, if any, it shall be sufficient compliance of the
requirements under such clauses if the salient features of
the policy and any change therein are specified in brief in
the Board’s report and the web-address is indicated
 therein at which the complete policy is available.
a One Person Company or small company.
SECTION 135(4) The report of the Board of Directors to be attached to the financial
statement under this section shall, in case of a One Person Company, mean
a report containing explanations or comments by the Board on every
qualification, reservation or adverse remark or disclaimer made by the
auditor in his report.

SECTION 134(5) Directors’ Responsibility Statement

Core areas Provisions

1) Accounting In the preparation of the annual accounts, the applicable accounting
Standards standards had been followed along with proper explanation relating to
material departures;
2) Accounting The directors had selected such accounting policies and applied them
Policies consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the
company at the end of the financial year and of the profit and loss of the
company for that period;
3) Proper And The directors had taken proper and sufficient care for the:-
Sufficient Care For  Maintenance of adequate accounting records in accordance with the
3 Thing provisions of this act
 For safeguarding the assets of the company and
 For preventing and detecting fraud and other irregularities;
4)Going Concern The directors had prepared the annual accounts on a going concern basis;
Basis and
5) Internal Financial The directors, in the case of a listed company, had laid down internal
Control financial controls to be followed by the company and that such internal
financial controls are adequate and were operating effectively
Explanation - for the purposes of this clause, the term “internal financial
controls” means the policies and procedures adopted by the company for
ensuring the orderly and efficient conduct of its business, including
adherence to company’s policies, the safeguarding of its assets, the
prevention and detection of frauds and errors, the accuracy and
completeness of the accounting records, and the timely preparation of
reliable financial information;
6) Compliance With The directors had devised proper systems to ensure compliance with the
All Laws And provisions of all applicable laws and that such systems were adequate and
Regulations operating effectively.

SECTION 134(6) SIGNING OF THE BOARD REPORT

 The Board’s report and any annexures thereto under sub-section (3) shall be signed by :-
a) its chairperson of the company if he is authorised by the Board and
b) where he is not so authorised, shall be signed by at least two directors, one of whom shall
be a managing director, or
c) by the director where there is one director (in case of OPC).
Note - Each & every page of annexure to be signed.

Section 134(7) Attachments and annexures

A signed copy of every financial statement, including consolidated financial statement, if any, shall
be issued, circulated or published along with a copy each of—
1. any notes annexed to or forming part of such financial statement;
2. the auditor’s report; and
3. the Board’s report referred to in sub-section (3).

Section 134(8) PENALTY FOR NON COMPLIANCE

If a company contravenes the provisions of this section, the company shall be punishable with fine
which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh
rupees and every officer of the company who is in default shall be punishable with imprisonment
for a term which may extend to three years or with fine which shall not be less than fifty thousand
rupees but which may extend to five lakh rupees, or with both.

Details of certain employees in Board Report

- Name of Top 10 Employees
- Every employee who gets more than the prescribed amount
OR
Employee whose Remuneration > MD/WD/MGER and Shareholding + Spouse > 2% of Equity of the
Co + Dependent Child
Disclosures under
other Sections of 1. Disclosures under other Sections of Companies Act, 2013
Companies Act, 2013

Section 178(4) states that the Board’s Report shall include a policy
formulated by Nomination and Remuneration Committee. The policy shall
ensure that :
 the level and composition of remuneration is reasonable
 and sufficient to attract, retain and motivate directors of the
quality required to run the company successfully;
 relationship of remuneration to performance is clear and
meets appropriate performance benchmarks; and
 Remuneration to directors, key managerial personnel and
senior management involves a balance between fixed and
incentive pay reflecting short and long-term performance
objectives appropriate to the working of the company and
its goals.

As per section 149(10) an independent director shall be eligible for

reappointment on passing of a special resolution and the Board’s Report
shall disclose such appointment.

Under section 177(8), Board’s Report shall disclose the composition of audit
committee and shall also disclose the recommendation of the audit
committee which is not accepted by the board along with reasons thereof.

Proviso to section 177(10) prescribes the inclusion of the details of

establishment of vigil mechanism under section 177(9) in the Board’s
Report.

As per section 204(1) every listed company and other prescribed companies
in Rule 9 Companies (Appointment & Remuneration of Managerial
Personnel) Rules, 2014 shall annex the secretarial audit report given by a
Company Secretary in practice with Board’s Report. Board in its report shall
explain any qualification or observation or other remarks made by the
Company Secretary in Practice.

Section 135(2) provides that the Board’s report under sub-section (3) of
section 134 shall disclose the composition of the Corporate Social
Responsibility Committee.

Section134(8) states that if a company contravenes the provisions of this

section, the company shall be punishable with fine which shall not be less
than fifty thousand rupees but which may extend to twentyfive lakhs
rupees. Every officer of the company who is in default shall be punishable
with imprisonment for a term which may extend to three years or with fine
which shall not be less than fifty thousand rupees but which may extend to
five lakhs rupees, or with both.
Under SEBI Under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
(Substantial 2011:
Acquisition of Shares
 Disclosure of acquisition and disposal (Regulation 29).
and Takeovers)
Regulations, 2011  Continual disclosures (Regulation 30).
 Disclosure of encumbered shares (Regulation 31).

Under SEBI (Listing Under SEBI (Listing Obligations and Disclosure Requirements) Regulations,
Obligations and 2015:
Disclosure
 Prior Intimations (Regulation 29)
Requirements)
 Disclosure of Events or Information [Regulation (30)]
Regulations, 2015
 Disclosures of Financial Results [Regulation (33)]
 Annual Report Disclosures [Regulation (34)]
 Website Disclosures [Regulation (46)]


UNDER SEBI UNDER SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015:

(PROHIBITION OF
Disclosures of Trading By Insiders
INSIDER TRADING)
REGULATIONS, 2015 Regulation 6(2) : The disclosures to be made by any person shall include
REFER SEBI (PIT) those relating to trading by such person’s immediate relatives, and by any
REGULATION NOTES. other person for whom such person takes trading decisions. It is intended
that disclosure of trades would need to be of not only those executed by the
person concerned but also by the immediate relatives and of other persons
for whom the person concerned takes trading decisions. These regulations
are primarily aimed at preventing abuse by trading when in possession of
unpublished price sensitive information and therefore, what matters is
whether the person who takes trading decisions is in possession of such
information rather than whether the person who has title to the trades is in
such possession.

The disclosures of trading in securities shall also include trading in

derivatives of securities and the traded value of the derivatives shall be
taken into account for purposes of this Chapter, provided that trading in
derivatives of securities is permitted by any law for the time being in force.

The disclosures made shall be maintained by the company, for a minimum

period of five years, in such form as may be specified.

Disclosures by Certain Persons

 Initial Disclosure (Regulation 7 (1))

 Continual Disclosures: Regulation 7(2)

Disclosures by other connected persons

Any company whose securities are listed on a stock exchange may, at its
discretion require any other connected person or class of connected persons
to make disclosures of holdings and trading in securities of the company in
such form and at such frequency as may be determined by the company in
order to monitor compliance with these regulations.

Code of Fair Disclosure (Regulation 8) (1)

 The board of directors of every company, whose securities are listed

on a stock exchange, shall formulate and publish on its official
website, a code of practices and procedures for fair disclosure of
unpublished price sensitive information that it would follow in order
to adhere to each of the principles set out in Schedule A to these
regulations, without diluting the provisions of these regulations in
any manner.
 Every such code of practices and procedures for fair disclosure of
unpublished price sensitive information and every amendment
thereto shall be promptly intimated to the stock exchanges where
the securities are listed
 SOME EXAMINATION QUESTIONS

1. What are the mandatory policies to be formulated under Companies Act 2013? Describe in
brief.
2. What are the disclosure pertaining to financial requirements under SEBI LODR Regulations,
2015?
3. Draft a sample corporate governance report of a listed company.
4. Write short note on CSR Policy.
5. Write in brief about various policies under SEBI LODR Regulations, 2015.
6. What are the contents of Management Discussion and Analysis report?
7. What the disclosures to be made in Corporate Governance Report?
8. What are the Financial Information which are required to be disclosed on the website of the
company as per regulation 46 of SEBI [LODR] Regulations ,2015.

Page
100
Page
101
Page
102
 CHAPTER 7
ACCOUNTING AND AUDIT RELATED ISSUES, RPTS AND VIGIL MECHANISM

Core Areas Provisions

Sec 141(1) (2) Qualification of Auditor

(1) A person shall be eligible for appointment as an auditor of a company only if

he is a chartered accountant:
Provided that a firm whereof majority of partners practising in India are qualified
for appointment as aforesaid may be appointed by its firm name to be auditor of a
company.

(2) Where a firm including a limited liability partnership is appointed as an

auditor of a company, only the partners who are chartered accountants shall be
authorised to act and sign on behalf of the firm.

Sec 141(3) The following persons shall not be eligible for appointment as an auditor of a
company, namely:—
(a) a body corporate other than a limited liability partnership registered
under the Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or
employee of the company;
(d) a person who, or his relative or partner—
(1) is holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a subsidiary
of such holding company:
Provided that the relative may hold security or interest in the
company of face value not exceeding one lakh rupees;
If the relative is holding securities more than 1 lakh rupees he has
to disposed it of within 60 days.
(2) is indebted to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, in
excess of five lakh rupees; or
(3) has given a guarantee or provided any security in connection with
the indebtedness of any third person to the company, or its
subsidiary, or its holding or associate company or a subsidiary of
such holding company, in excess of one lakh rupees;
(e) a person or a firm who, whether directly or indirectly, has “business
relationship” with the company, or its subsidiary, or its holding or
associate company or subsidiary of such holding company or associate
company of such nature as may be prescribed;

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103
 The term “business relationship” means any commercial transaction but
excludes as follows:
(i) commercial transactions which are in the nature of professional services
permitted to be rendered by an auditor or audit firm under the Act and the
Chartered Accountants Act, 1949 and the rules or the regulations made
under those Acts;
(ii) commercial transactions which are in the ordinary course of business of the
company at arms length price - like sale of products or services to the auditor, as
customer, in the ordinary course of business, by companies engaged in the
business of telecommunications, airlines, hospitals, hotels and such other similar
businesses.
(f) a person whose relative is a director or is in the employment of the
company as a director or key managerial personnel;

(g) a person who is in full time employment elsewhere or a person or a

partner of a firm holding appointment as its auditor, if such persons or partner is
at the date of such appointment or reappointment holding appointment as
auditor of more than twenty companies;
one person companies, dormant companies, small companies and Private
Companies having paid up share capital of less than ` 100/ - Crore, are not to be
counted in the maximum limit of audit which is twenty for Auditors
(h) a person who has been convicted by a court of an offence involving fraud
and a period of ten years has not elapsed from the date of such
conviction;
(i) a person who, directly or indirectly, renders any service referred to in
section 144 to the company or its holding company or its subsidiary company.

Notes:

Substantial A CA shall be guilty of professional misconduct if he expresses opinion on

Interest financial statements of an enterprise if his relative holds substantial interest
(≥ 20% voting sh/profit)
(Progressive
Basis) Q) An auditor recovers fees on progressive basis 7 lacs.Is he disqualified

Ans: No

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104
d) Is a PERSON, Who is his RELATIVE or a partner

Is holding

Security of Interest In The

company

Its Its Holding

Subsidiary company
company

Its Associate Its Subsidiary

company of a holding
company

5 KA CHAKRAVYUH SPECIAL CASE

e) Is a PERSON or a FIRM who :

DIRECTLY or INDIRECTLY HAS BUSINESS RELATIONSHIP*

The
company

Its holding
Its Associate company
company

Subsidiary
of a holding
Subsidiary of company
a Associate
company Page Its
104 Subsidiary
company
 6 KA CHAKRAVYUH SPECIAL CASE

Sec 143(12) Reporting of Fraud By An Auditor

Core Areas Provisions

this purpose the Companies (Audit and Auditors) Amendment Rules, 2015
(“Audit Amendment Rules”), were notified on December 15, 2015.
Under the earlier provisions, any fraud being committed against the company
by its officers or employees was required to be reported to the Central
Government. Now a threshold of ` 1 crore has been inserted.
If the auditor does discover a fraud of ` 1 crore or above, then the auditor must
report the fraud to the board of directors or the audit committee of the
company (as the case may be) not later than 2 days of discovery of the fraud.
Then the board of directors or audit committee is required to give its reply or
observations to the auditor within 45 days, which is to be forwarded to the
Central Government, failing which, the auditor shall forward his own report to
the central government with a note mentioning that no reply or observations
were received from the board of directors or the audit committee of the
company within the prescribed 45 days.
For a fraud below ` 1 crore, the auditor is required to report the fraud to the
board of directors or the audit committee not later than 2 days of its discovery
specifying the name of the fraud committed with a description of the same, the
approximate involved and the parties involved in the fraud. Then, in the report
of the board of directors for that financial year, the above mentioned details
shall be provided along with the remedial action which was taken resultant to
the fraud which was committed.
Reporting of Fraud by an Auditor (Sec. 143(12) to (15) of the Companies Act,
2013

When is reporting required?  if ifAn auditor has reason to believe

 that an offence involving material
fraud has been committed or is
being committed
 Against the company by officers or

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105
 employees of the company
 Auditor is required to report such
material Fraud

Report to whom? The auditor shall report the matter to CG

No liability of auditor  an auditor shall not be deemed to be

guilty for breach of any of his duties
 by reason of his reporting any matter to
CG

Provisions applicable to other The provision about reporting of fraud shall

auditors mutatis mutandis apply to –
a) the cost account in practice conducting cost
audit u/s 148, or
b) the company secretary in practice
conducting secretarial audit u/s 204
Punishment for non- minimum fine ` 1,00,000
compliance maximum fine ` 25,00,000

Time and manner of The report shall be in the form of a statement

reporting of fraud by auditor as specified in Form ADT-4
(Rule 13) These provisions shall also apply,, mutatis
mutandis, to –
 a cost auditor during the performance
of his duties u/s 148; and
 a secretarial auditor during the
performance of his duties u/s 204
No Liability Of No duty to which an auditor of a company may be subject to shall be regarded as
auditor (Sec having been contravened by reason of his reporting the matter referred to in sub-
143(13)) section (12) if it is done in good faith.

Provisions The provisions of this section shall mutatis mutandis apply to—
applicable to
(a) the cost accountant conducting cost audit under section 148; or
other auditors (b) the company secretary in practice conducting secretarial audit under section
(Sec 143(14)) 204.

Punishment for If any auditor, cost accountant or company secretary in practice do not comply
Non- with the provisions of sub-section (12), he shall be punishable with fine which
compliance shall not be less than one lakh rupees but which may extend to twenty-five lakh
(Sec 143(15)) rupees.

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106
 AUDITORS SUSPECT FRAUD

Auditor to confirm if fraud exists

If

YES Individual NO
Frauds

> Limit? AGAINST THE

COMPANY BY
2 Days

Report to Audit
Within 2 Days of knowledge of the 1 Crore
fraud. Report to Audit
Committee

(If no AC ------- BOD)

Wait for reply for

45 days

Reply received No reply received

For 45 days
Fraud Confirmed

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107
after completion of 45 days
Report to Central Government
Within 15 days of receiving the reply ADT - 4 + Letter Head to
Secretary MCA + their replies +
Auditors Comment on that reply
by speed post / Reg. post e-mail

Sec 144 Audit Not to render certain Service

Core Areas Provisions

Services to be An auditor appointed under this Act shall provide to the company only such
approved other services as are approved by the Board of Directors or the audit committee,
as the case may be,

Prohibited An auditor shall not include any of the following services (whether such services
Services are rendered directly or indirectly to the company or its holding company or
subsidiary company, namely:—
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed:

Meaning of Explanation—For the purposes of this sub-section, the term “directly or

‘Directly and indirectly” shall include rendering of services by the auditor,—
Indirectly’ (i) in case of auditor being an individual, either himself or through his relative or
any other person connected or associated with such individual or through
any other entity, whatsoever, in which such individual has significant
influence or control, or whose name or trade mark or brand is used by such
individual;
(ii) in case of auditor being a firm, either itself or through any of its partners or
through its parent, subsidiary or associate entity or through any other entity,
whatsoever, in which the firm or any partner of the firm has significant influence
or control, or whose name or trade mark or brand is used by the firm or any of its
partners.

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MANDATORY ROTATION OF AUDITORS

Sec 139(2) ,(4) Rotation of Auditor

A) For which company Rotation of Audit from Not compulsory
B) For which company Rotation of Audit from compulsory
Sec 139(2) ,(4) A. Not compulsory
OPC
Small Company
B. 1. Listed Company.
2. Unlisted public company paid up share capital ≥ 10 Crores
3. PVT Ltd company paid up share capital ≥ 50 Crores
4. Company having public borrowings from financial institution , banks or public
deposits ≥50 Crores

CASE 1 :- COMMON PARTNER

AVINASH SANCHETI

AVINASH NAVNEET LLP AVINASH ALIAA LLP

5+5

LISTED COMPANY

CASE 2 :-SAME NETWORK/BRAND

PWC LTD

Page
109
 PWC HYDERABAD PWC BANGALORE

5+5

LISTED
COMPANY

RESIGN & JOIN

MNO & CO.LLP QRS & CO.LLP

COOLING PERIOD

LISTED
COMPANY

New firm formed by partner who was in charge of firm and use
sign financial statements wont be eligible for next 5 years

Explanation a) As on the date of appointment no audit firm having a common partner or

partners to the other firm, whose tenure has expired in a company
immediately preceding the financial year, shall be appointed as a auditor
of the same company for a period of 5 years
b) The incoming auditor or audit firm shall not be eligible if such
auditor or audit firm is associated with the outgoing auditor or audit
firm under the same network of audit firms
For the purposes of these rules the term “same network” includes
the firms operating or functioning, hitherto, under the same brand
name, trade mark, or common control
c) If a partner, who is in charge of an audit firm and also certifies the
financial statements of the company, retires from the said firm and
joints another firm of chartered accountants, such other firms shall

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 also be ineligible to be appointed for a period of 5 years

Auditor should serve cooling period as Follows

Type of Auditor Cooling period

Individual Auditor 5 years
Ca Firm 5 years
Sec 139(3) Rotation of Audit Partner, Audit Team, and Joint Audit

Subject to the provisions of this Act, members of a company may resolve to

provide that—
(a) in the audit firm appointed by it, the auditing partner and his team shall
be rotated at such intervals as may be resolved by members; or
(b) the audit shall be conducted by more than one auditor.

AUDITING STANDARDS
 The Standards on Auditing have been accorded legal sanctity in the under the Companies Act
2013. Auditors are now mandatorily bound by to ensure compliance with Standards on Auditing.
 As per Section 143(2) of the Companies Act 2013, the auditor shall make a report to the
members of the company on the accounts examined by him and on every financial statements
which are required by or under this Act to be laid before the company in general meeting and
the report shall after taking into account the provisions of this Act, the accounting and auditing
standards and matters which are required to be included in the audit report under the
provisions of this Act or any rules made thereunder or under any order made under sub-section
(11) and to the best of his information and knowledge, the said accounts, financial statements
give a true and fair view of the state of the company’s affairs as at the end of its financial year
and profit or loss and cash flow for the year and such other matters as may be prescribed.
 As per Section 143(9) of the Companies Act 2013, it is the duty of every auditor to comply with
the auditing standards.
 The Section 143(10) confers power to the Central Government to prescribe the standards of
auditing as recommended by the Institute of Chartered Accountants of India in consultation
with the National Financial Reporting Authority:
However, until any auditing standards are notified, any standard or standards of auditing
specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing
standards.

SECTION 138 INTERNAL AUDIT

Core areas Provisions

Internal Audit Internal Audit is a part of internal control which ensures that whether other
parts of internal control are operating effectively.

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Mandatory for certain
1) Following companies as prescribed below shall be required to appoint
companies only
an internal auditor, who shall either be a chartered accountant or a cost
accountant, or such other professional as may be decided by the Board to
conduct internal audit of the functions and activities of the company.
The following class of companies shall be required to appoint an internal
auditor or a firm of internal auditors, namely:-
a) every listed company;
b) every unlisted public company having:-
 paid up share capital of FIFTY CRORE RUPEES or more during the
preceding financial year; or
 turnover of TWO HUNDRED CRORE RUPEES or more during the
preceding financial year; or
 outstanding loans or borrowings from banks or public financial
institutions exceeding ONE HUNDRED CRORE RUPEES or more at
any point of time during the preceding financial year; or
 outstanding deposits of TWENTY FIVE CRORE RUPEES or more at
any point of time during the preceding financial year; and
c) every private company having-
 turnover of TWO HUNDRED CRORE RUPEES or more during the
preceding financial year; or
 outstanding loans or borrowings from banks or public financial
institutions exceeding ONE HUNDRED CRORE RUPEES or more at
any point of time during the preceding financial year
Provided that an existing company covered under any of the above criteria shall
comply with the requirements of section 138 and this rule within six months of
commencement of such section.
Explanation. - For the purposes of this rule -
 the internal auditor may or may not be an employee of the
company;
 the term “Chartered Accountant” shall mean a Chartered
Accountant whether engaged in practice or not
Who determines the
2)The Audit Committee of the company or the Board shall, in
scope?
consultation with the Internal Auditor, formulate the scope,
functioning, periodicity and methodology for conducting the internal audit.

Internal audit Paid Turnover Outstanding Outstanding

compulsory for up loans and deposits
capital borrowings
Every Listed
Company

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112
 Public Company 50 Cr or 200 Cr or 100 Cr or 25 Cr or
more more more more

Private Company No limit 200 Cr or 100 Cr or No limit

more more

Core areas Provisions

Other points 3) The Central Government may, by rules, prescribe the manner and the
intervals in which the internal audit shall be conducted and reported to the
Board.

1. Are the following companies required to conduct internal audit as per Sec 138
i. Unlisted Public Company with paid up capital 48 crore and turnover 250 crore
ii. Private company with paid up capital 55 crore
iii. Private Company whose turnover is 250 crore
2. What qualification is prescribed for internal auditor?
3. Who determine the scope of Internal auditor?
4. Can an employee of the company be appointed as internal auditor?
5. Can a chartered accountant, not in practice be appointed as internal auditor?

SECRETARIAL AUDIT
As per section 204(1) of Companies Act, 2013 read with rule 9 of the Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014, the following companies are required to obtain
Secretarial Audit Report:
 Every listed company;
 Every public company having a paid-up share capital of fifty crore rupees or more; or
 Every public company having a turnover of two hundred fifty crore rupees or more.
 Every company having outstanding loans or borrowings from banks or public financial
institutions of one hundred crore rupees or more. (new provision)* (03-01-2020)

Regulation 24A of SEBI (LODR) regulations, 2015 provides that, every listed entity and its material
unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its
annual report, a secretarial audit report, given by a company secretary in practice, in such form as may
be specified with effect from the year ended March 31, 2019.

SEC 132 Constitution of National Financial Reporting Authority(NFRA)

Core Areas Provisions

Section 132(1) The Central Government may, by notification, constitute a National

Page
113
CG Constitutes Financial Reporting Authority to provide for matters relating to accounting
NFRA and auditing standards under this Act. NFRA shall perform such its functions
through such divisions as may be prescribed

(1A) The National Financial Reporting Authority shall perform its functions
through such divisions as may be prescribed

Section 132(2) Notwithstanding anything contained in any other law for the time being in
force, the National Financial Reporting Authority shall--
Role of NFRA
(a) make recommendations to the Central Government on the formulation
and laying down of accounting and auditing policies and standards for
adoption by companies or class of companies or their auditors, as the case
may be;
(b) monitor and enforce the compliance with accounting standards and
auditing standards in such manner as may be prescribed;
(c) oversee the quality of service of the professions associated with ensuring
compliance with such standards, and suggest measures required for
improvement in quality of service and such other related matters as may be
prescribed; and
(d) perform such other functions relating to clauses (a), (b) and (c) as may be
prescribed.

Section 132(3) The NFRA shall Consist of:-

Constitution of (1) chairperson, who shall be a person of eminence and having expertise
NFRA and its in accountancy, auditing, finance or law to be appointed by the
Composition Central Government and
(2) SUCH OTHER MEMBERS NOT EXCEEDING FIFTEEN consisting of part-
time and full-time members as may be prescribed:

Provided that the terms and conditions and the manner of appointment of
the chairperson and members shall be such as may be prescribed:

Provided further that the chairperson and members shall make a declaration
to the Central Government in the prescribed form regarding no conflict of
interest or lack of independence in respect of his or their appointment:

Provided also that the chairperson and members, who are in full-time
employment with National Financial Reporting Authority shall not be
associated with any audit firm (including related consultancy firms) during the
course of their appointment and two years after ceasing to hold such
appointment.

3A) Each division of the National Financial Reporting Authority shall be

presided over by the chairperson or a full time Members authorised by the
Chairperson.

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 3B) There shall be an executive body of the National Financial Reporting
Authority consisting of the Chairperson and full-time members of such
authority for effective discharge of its functions under sub-section(2)[other
than clause(a) and sub-section (4).]

Section 132(4) Notwithstanding anything contained in any other law for the time being in
force, the National Financial Reporting Authority shall -
Powers of NFRA
(a) have the power to investigate, either suo motu or on a reference made to
it by the Central Government, for such class of bodies corporate or persons, in
such manner as may be prescribed into the matters of professional or other
misconduct committed by any member or firm of chartered accountants,
registered under the Chartered Accountants Act, 1949 (38 of 1949):

Provided that no other institute or body shall initiate or continue any

proceedings in such matters of misconduct where the National Financial
Reporting Authority has initiated an investigation under this section;

(b) have the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following
matters, namely:--

(i) discovery and production of books of account and other documents, at

such place and at such time as may be specified by the National Financial
Reporting Authority;

(ii) summoning and enforcing the attendance of persons and examining them
on oath;

(iii) inspection of any books, registers and other documents of any person
referred to in clause (b) at any place;

(iv) issuing commissions for examination of witnesses or documents;

(c) where professional or other misconduct is proved, have the power to
make order for--

(A) imposing penalty of--

(I) not less than one lakh rupees, but which may extend to five times of the
fees received, in case of individuals; and
(II) not less than Five lakh rupees, but which may extend to ten times of the
fees received, in case of firms;
(B) debarring the member or the firm from engaging himself or itself from
being appointed as an Auditor or internal auditor of any company or body
corporate Or from performing any valuation service u/s 247 for a minimum
period of six months or for such higher period not exceeding ten years as may

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115
 be decided by the National Financial Reporting Authority.

Explanation.--For the purposes of his sub-section, the expression “professional

or other misconduct” shall have the same meaning assigned to it under
section 22 of the Chartered Accountants Act, 1949 (38 of 1949).

Section 132(5) Any person aggrieved by any order of the National Financial Reporting
Authority issued under clause (c) of sub-section (4), may prefer an appeal
Appeal to NCLAT
before the Appellate Authority constituted under sub-section (6) in such
manner as may be prescribed.

Section Omitted-
132(6,7,8,9)

Section 132(10) The National Financial Reporting Authority shall meet at such times and
places and shall observe such rules of procedure in regard to the transaction
Meeting
of business at its meetings in such manner as may be prescribed.

Section 132(11) The Central Government may appoint a secretary and such other employees
as it may consider necessary for the efficient performance of functions by the
Secretary
National Financial Reporting Authority under this Act and the terms and
conditions of service of the secretary and employees shall be such as may be
prescribed.

Section 132(12) The head office of the National Financial Reporting Authority shall be at New
Delhi and the National Financial Reporting Authority may, meet at such other
Officers
places in India as it deems fit.

Section 132(13) The National Financial Reporting Authority shall cause to be maintained such
books of account and other books in relation to its accounts in such form and
Books- C & AG
in such manner as the Central Government may, in consultation with the
Comptroller and Auditor-General of India prescribe.

Section 132(14) The accounts of the National Financial Reporting Authority shall be audited
by the Comptroller and Auditor-General of India at such intervals as may be
Audit- C & AG
specified by him and such accounts as certified by the Comptroller and
Auditor-General of India together with the audit report thereon shall be
forwarded annually to the Central Government by the National Financial
Reporting Authority.

Section 132(15) The National Financial Reporting Authority shall prepare in such form and at
such time for each financial year as may be prescribed its annual report giving
Parliament
a full account of its activities during the financial year and forward a copy
thereof to the Central Government and the Central Government shall cause
the annual report and the audit report given by the Comptroller and Auditor-
General of India to be laid before each House of Parliament.

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SEC 133 Central Government to Prescribed Accounting Standards

Core Areas Provisions

The Central Government may prescribe the standards of accounting or any

addendum thereto, as recommended by the Institute of Chartered
Accountants of India, constituted under section 3 of the Chartered
Accountants Act, 1949 (38 of 1949), in consultation with and after
examination of the recommendations made by the National Financial
Reporting Authority.
The Central Government may prescribe the standards of accounting or any
addendum thereto, as recommended by the Institute of Chartered
Accountants of India, constituted under section 3 of the Chartered
Accountants Act, 1949 (38 of 1949), in consultation with and after
examination of the recommendations made by the National Financial
Reporting Authority.
The MCA through notification dated 16 February 2015 has issued the
Companies (Indian Accounting Standards) Rules, 2015 (Rules) which lay
down a road map for companies. The Rules will come into force from the
date of its publication in the Official Gazette. The Ind AS shall be applicable
to companies as explained in the table below:
Phase I Phase II Voluntary
Adoption
Year of adoption 2016-17 2017-18 2015-16 or
thereafter
Comparison Year 2015-16 2016-17 2014-15 or
thereafter

Companies Phase I Phase II Voluntary

Covered Adoption
Listed Companies having net All companies Any company
Companies worth ≥INR 500 Crores Listed or in who Voluntary
process of being Adopts IND AS
listed
Un-Listed Companies having net Companies
Companies worth ≥INR 500 Crores having net
worth ≥INR 250
Crores
Grouped Applicable to holding,

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117
 Companies Subsidiary Joint
venture or Associate
Company covered in
(a) and(b) above This
may also apply fellow
subsidiary companies
while preparing CFS of
the holding companies
Exemptions– The insurance companies, banking companies and non-banking
finance companies, company listed at SME Stock Exchange. shall not be
required to apply Indian Accounting Standards (Ind AS) for preparation of
their financial statements either voluntarily or mandatorily as specified in
sub-rule (1) of rule 4.

Gaap generally accepted accounting principles ia a collections of commonly

followed accounting rules and standards for financial reporting

GAAP

NATIONAL GAAP INTERNATIONAL GAAP

(UK, OTHER EUROPIAN CONTRIES)

AS ONLY IN INDIA NEW VERSION

IFRS

NEW VERSION
IND AS
(PREPARED IN LINE WITH IFRS)

2 OPTIONS

ADOPT IFRS IFRS

EX- BANGLADESH CONVERGE INDIA
Earlier national advisory committee on nacas was accounting standards
recommeding accounting standards C4
NOW NFRA WILL DISCHARGE THIS RESPONCIBILITY – SEC 132 MCA
NFRA

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118
1) A ltd Holding Co 2nd observation
Unlisted Indian Co
(NW 200 Cr)

K Ltd 1st Observation Pvt Ltd 3rd Observation

Unlisted (Subsidiary) Australian (Subsidiary)
Indian Company Foreign Co
NW 400 cr
2nd phase

Is IND AS applicable
K Ltd ? Yes (1st It will start from here)
A Ltd? Yes (Due to holding Co. of K Ltd)
J Pvt Ltd? Yes (Because it is subsidiary of A Ltd)

2) A ltd Holding Co
Unlisted Indian Co
(NW 200 Cr)

Korea Ltd Australian Based

Foreign Co J Pvt Ltd
NW 400 Cr 30 Cr

Is IND AS applicable
Korea No
A ltd No
J Pvt Ltd No

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SECTION 188

“related party”, with reference to a company, means—

(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a fi rm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds along with his relatives,
more
than two per cent. of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act
in
accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions
given
in a professional capacity;
(viii) Any Body Corporate which is
(a) A holding, subsidiary or an associate company of such company.
(b) A subsidiary or a holding company to which it is also a subsidiary, or
(c) An investing company or the venturer of the Company.

(ix) such other person as may be prescribed;

Provided that clause (ix) will not apply to a private company. (Amendment)

“relative”, with reference to any person, means any one who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed; The Rules prescribed as
under:
A person shall be deemed to be the relative of another, if he or she is related to another in the following
manner, namely:-
(1) Father: Provided that the term “Father” includes step-father.
(2) Mother: Provided that the term “Mother” includes the step-mother.
(3) Son: Provided that the term “Son” includes the step-son.
(4) Son’s wife. (Explanation :- For the purpose of this clause, “the investing company or the venturer
of a
company” means a body corporate whose investment in the company would result in the company
becoming an associate company of the body corporates.)
(5) Daughter.
(6) Daughter’s husband.
(7) Brother: Provided that the term “Brother” includes the step-brother;
(8) Sister: Provided that the term “Sister” includes the step-sister. Exceptions:

• Person giving advise, directors or instructions in a professional capacity will not be deemed to be a
‘related party’

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• transactions entered into by the company in the ordinary course of their business if such transactions
are on arm’s length basis:

OR in GM NOT REQUIRED IF the transactions is entered between holding and 100% subsidiary. 5th
proviso to sec 188(1)
“The requirement of passing the resolution under fi rst proviso shall not be applicable for transacti
ons entered into between a holding company and its wholly owned subsidiary whose accounts are
consolidated with such holding company and placed before the shareholders at the general meeting
for approval inserted by Companies (Amendment) Act 2015.”
MCA Circular on Government Companies
“The related party transaction between two Government companies are exempted from obtaining
approval by ordinary and Board resolution ”

IF a Co. is required to form an audit committee then audit committee approval required.

(1) BR at BM before entering into RPT. Except with the consent of the Board of Directors given by a
resolution
at a mee ti ng of the Board and subject to such conditions as prescribed below, no company shall enter
into
any contract or arrangement with a related party with respect to--
(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party’s appointment to any office or place of profit in the company, its subsidiary
company or associate company; and
(g) underwriting the subscription of any securities or derivatives thereof, of the company:
(2) Prior ordinary resolution if certain limits on the next page are crossed.
(3) Register as per MBP-4 (sec 189)
(4) Disclosures in board’s report.

Step 1 and Step 2 not required if RPT transaction is in ordinary course of business and at arm’s
length in case of unlisted companies. But details to be entered in MBP-4.

If a listed Co. enters into Material RPT OR in GM required even if transaction is in ordinary course of
business AND at arm’s length (Refer Q-2)

Definition of Material Related Party transactions as per SEBI LODR Regulations.

provided that no members shall vote at shareholders meeting if such member is a related party
Provided also that nothing contained in the second proviso shall apply to a company in which ninety per
cent
or more members, in number, are relatives of promoters or are related parties.

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CONDITIONS:
A company shall enter into any contract or arrangement with a related party subject to the following
conditions,
namely:-
(1) The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose
prescribed
matters
Nef of Material Related Party transaction as per SEBI LODR Regulations.
(2) Where any director is interested in any contract or arrangement with a related party, such director
shall
not be present at the mee ti ng during discussions on the subject matter of the resolution relating to
such
contract or arrangement-
Exemption: In case of private companies, interested director may participate on Board Meeting in
which
such contracts or arrangement is going to be discussed where he is interested alter disclosure of
interest.
Even in case of IFSC public company director can vote alter disclosure of interest.
a company shall not enter into a transaction or transactions, where the transaction or transactions to be
entered
into -
(a) as contracts or arrangements with respect to clauses (a) to (e) of sub-sec ti on (1) of sec ti on 188 with
criteria, as mentioned below –

AMENDMENTS ON 18-11-2019
NATURE OF RELATED PARTY TRANSACTION
For Every Transaction
Sale, purchase or supply of any goods or materials Amounting to 10% of Turnover of Company
directly or through appointment of agents (or)

Selling or otherwise disposing of, or buying, Amounting to 10% of Net worth

property of any kind directly or through
appointment of agents (or)
Leasing of property of any kind Amounting to >_ 10% of Turnover of Company
(or)

Availing or rendering of any services directly or Amounting 10 % of Turnover of company

through appointment of agents (or)

Appointment to any office or place of profit in > 2.5 Lacs Per Month
the company, its subsidiary company or associate
company (or)
Remuneration for underwriting the subscription of > 1% of Networth
any securities or derivative
If a listed company is entering into RPT for them this value will apply + even SEBI LODR

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Note: The Transaction value has to be checked cumulatively for one financial year.
• Turnover and Net worth as per Audited Financial Statement of Preceding Financial Year.
• If any member is interested in any transaction, than such member shall not cast vote in meeting
regarding such resolution .
• It is here by clarified that the limits specified in sub-clause (i) to (iv)shall apply for Transaction and
transactions to be entered into either individually or taken together with previous transactions
during a financial year.

(b) appointment to any office or place of profit in the company, its subsidiary company or associate
company
at a monthly remuneration exceeding two and half lakh rupees as mentioned in clause (f) of sub-sec ti
on
(!) of section 188; or
Office or place of Profit
Audit Committee approval BR + OR in GM

Amitabh Bachhan is director of X ltd. His son Abhishek was appointed as production manager/ finance
manager/ HR manger of X ltd. @ 5/7 lac per month. We will say Abhishek is holding office or place of
profit

OSA

Own Company Subsidiary Company Associate Company

(c) remuneration for underwriting the subscription of any securities or derivatives thereof of the
company exceeding one percent. of the net worth as mentioned in clause (g) of sub section (!) of
section 188.
Explanation. - (!) The Turnover or Net Worth referred in the above sub-rules shall be on the basis of
the Audited Financial Statement of the preceding Financial year.
(3) In case of wholly owned subsidiary, the ordinary resolution passed by the holding company shall be
sufficient for the purpose of entering into the transactions between wholly owned subsidiary and
holding
company.
(4) The explanatory statement to be annexed to the notice of a general meeting convened pursuant to
sec ti on !0! shall contain the following particulars namely:-
(a) name of the related party ;
(b) name of the director or key managerial personnel who is related, if any;
(c) nature of relationship;
(d) nature, material terms, monetary value and particulars of the contract or arrangement; any other
information relevant or important for the members to take a decision on the proposed resolution .

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Provided further that no member of the company shall vote on such resolution , to approve any
contract or arrangement which may be entered into by the company, if such member is a related
party ( Not Applicable to Private Company) w.e.f 5-6-2015.
Provided also that nothing contained in the second proviso shall apply to a company in which ninety
percent or more members, in number, are relatives of promoters or are related par ti es.
Provided also that nothing in this sub-section shall apply to any transactions entered into by the
company in its ordinary course of business other than transactions which are not on an arm’s length
basis. It means that neither BR or ordinary resolution required.

Explanation.--In this sub-section,--

(a) the expression “office or place of profit” means any office or place--
(i) where such office or place is held by a director, if the director holding it receives from the company
anything by way of remuneration over and above the remuneration to which he is entitled as director,
by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
(ii) where such office or place is held by an individual other than a director or by any fi rm, private
company or other body corporate, if the individual, fi rm, private company or body corporate holding
it receives from the company anything by way of remuneration, salary, fee, commission, perquisites,
any rent-free accommodation, or otherwise;
(b) the expression “arm’s length transaction” means a transaction between two related par ti es that is
conducted as if they were unrelated, so that there is no conflict of interest.
(3) Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s
report
to the shareholders along with the jus ti fi ca ti on for entering into such contract or arrangement.
(4) Where any contract or arrangement is entered into by a director or any other employee, without
obtaining
the consent of the Board or approval by a ordinary resolution in the general mee ti ng under sub-secti
on
(1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within
three months from the date on which such contract or arrangement was entered into, such contract or
arrangement shall be voidable at the option of the Board or as the case may be of the share holder
and if
the contract or arrangement is with a related party to any director, or is authorised by any other
director,
the directors concerned shall indemnify the company against any loss incurred by it.
(5) Without prejudice to anything contained in sub-sec ti on (3), it shall be open to the company to
proceed
against a director or any other employee who had entered into such contract or arrangement in
contravention of the provisions of this section for recovery of any loss sustained by it as a result of such
contract or arrangement.
(i) Any director or any other employee of a company, who had entered into or authorised the contract
or arrangement in violation of the provisions of this section shall,--
(ii) in case of listed company, be punishable with imprisonment for a term which may extend to one
year or with fi ne which shall not be less than twenty-five thousand rupees but which may extend to
five lakh rupees, or with both; and in case of any other company, be punishable with fi ne which shall
not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

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Q1) A company named Reliance Industries Limited enters into purchase / sale of goods with its director
Anil Ambani. The value of the transaction is 150 cr. The turnover of the company is ` 2000 cr. What
are the legal compliance that a company will have to do?

Ans: As per sec ti on 188 of the Companies Act, 2013, when a company enters into a contract with a
related party for purchase / sales of goods, then certain formalities are to be done. As Anil Ambani
(director of the company) is a related party, following steps are to be done:-
Step 1 :- Audit Committee Approval to be obtained. Sec 177
Step 2 :- Prior Board resolution at board meeting to be passed assuming transaction is not at arm’s
length basis and not in ordinary course of business.
Step 3 :- Prior Ordinary resolution at general meeting
If RPT > 10% of turnover of the company or 100 cr. [whichever is lower]
Therefore prior OR is required because RPT > 100 cr. [lower of the two].
Step 4 :- Directors Report shall contain the reason for entering such contracts.
Step 5 :- Details of such contracts must be entered in a separate register as per Sec ti on 189.
If RPT is in ordinary course and at arm’s length, then step 2 and 3 is not required.

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 SOME EXAMINATION QUESTIONS

1. Suggest some measures to increase auditors’ effectiveness?

2. What is NFRA? What is the need of NFRA? What intent is it trying serve?
3. Which all entities are governed by NFRA? What are the powers and functions of NFRA?
4. What is whistle blowing? Types of Whistleblowers.
5. Write the provisions for mandatory rotation of auditors in India.
6. Does having an independent audit prevent scams? Justify your answer.
7. Write a short note on Internal Audit.
8. Explain in brief the provisions and importance of secretarial audit.

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 CHAPTER 8
Corporate Governance and Shareholders Rights

PROMOTER: A promoter is a person, firm or company who does the preliminary work
for the formation of a company, including
 Framing its memorandum and articles of association,
 Its incorporation process and initial raising of capital for business.

Securities Exchange Commission Rule of US 405 (a) defines promoter as a

“person who acting alone or in conjunction with other persons directly or
indirectly takes the initiative in founding or organizing the business
enterprise.

A promoter is neither a trustee nor an agent of the company but he has a

fiduciary relationship with the company. Fiduciary relation means a
relation of trust and confidence.

Companies Act, 2013: a “promoter” means a person—

According to Sec 2 (69)
of Companies Act,
2013
Role and Liabilities of Role and Liabilities of Promoters As per The Companies Act,2013:
Promoters
 who has been named as such in a prospectus or is identified by the
company in the annual return referred to in section 92; or
 who has control over the affairs of the company, directly or
indirectly whether as a shareholder, director or otherwise; or
 In accordance with whose advice, directions or instructions the
Board of Directors of the company is accustomed to act.
 Officer in Default : Under Section 2(59) and Section 2(60) any
person in accordance with whose advice, directions or instructions
the Board of Directors of the company is accustomed to act can be
treated as an officer in default. Thus promoter if found in default of
provisions of the act may be penalised with fine or punished by
imprisonment.
 Incorrect information during incorporation: Promoters shall be
liable if they furnish any false or incorrect information in the
documents filed at the time of registration of the company.
 False or misleading Prospectus: Promoters who authorise a
prospectus which is untrue or misleading are subject to criminal
liability (Sec 34) and civil liability and are required to pay
compensation to every person who has sustained loss or damage
because of such prospectus. (Sec 35)
 Contravention of Provisions of Raising Equity Capital: Similarly if
the promoters contravene any provisions of the act while issuing
prospectus or during private placement they may be penalised or
imprisoned.
 Improper Notice of General Meeting: Section 102 deals with the

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 matters relating to “Statement to be annexed to notice”. Its sub-
section (5) states that if any default is made in complying with the
provisions of this section, every promoter, director, manager or
other key managerial personnel who is in default shall be
punishable with fine which may extend to fifty thousand rupees or
five times the amount of benefit accruing to the promoter,
director, manager or other key managerial personnel or any of his
relatives, whichever is more.

MAJORITY AND MINORITY SHAREHOLDERS:

When an individual, organization or group of shareholders together hold or control more than 50%
shares of the company they are known as majority shareholders. If a company has a majority
shareholder then all other shareholders become minority shareholders as they holdless than 50%
shares.
The interests, goals, and investment horizons of majority shareholders may vary from minority
shareholders. Majority shareholder may decide on investing company surplus in a new risky venture
whereas minority shareholders may prefer return in the form of dividends. A proper balance of the
rights of majority and minority shareholders enables efficient functioning of the company.

PROTECTION OF RIGHTS OF SHAREHOLDERS/INVESTORS IN INDIA:

Securities and Exchange Board of India (SEBI) is the capital market regulator and nodal agency in
India who regulates the security market. One of the objectives of the SEBI is to provide a degree of
protection to the investors not only against frauds and cheating but also against the losses arising
out of unfair practices. Such practices may include:
 Deliberate misstatement in offer statements to investors .
 Price manipulations.
 Insider trading.
SEBI has issued many guidelines and regulations to regulate the capital market and to protect the
investors. Some of the guidelines are:
 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
 SEBI (Prohibition of Insider Trading) Regulations 2015.
 SEBI has set up a separate cell to address the grievances of investors - SEBI Complaints
Redressal System (SCORES).

SECTION 125 INVESTOR EDUCATION AND PROTECTION FUND

Core areas Provisions

Cg shall establish the (1) The Central Government shall establish a Fund to be called the Investor
fund Education and Protection Fund (herein referred to as the Fund).

Amount credited to the (2) There shall be credited to the Fund--

fund (a) the amount given by the Central Government by way of grants after due
appropriation made by Parliament by law in this behalf for being utilised for
the purposes of the Fund;

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 (b) donations given to the Fund by the Central Government, State
Governments, companies or any other institution for the purposes of the
Fund;
(c) the amount in the Unpaid Dividend Account of companies transferred to
the Fund under subsection (5) of section 124;
(d) the amount in the general revenue account of the Central Government
which had been transferred to that account under sub-section (5) of section
205A of the Companies Act, 1956 (1 of 1956), as it stood immediately before
the commencement of the Companies (Amendment) Act, 1999 (21 of 1999),
and remaining unpaid or unclaimed on the commencement of this Act;
(e) the amount lying in the Investor Education and Protection Fund under
section 205C of the Companies Act, 1956 (1 of 1956);
(f) the interest or other income received out of investments made from the
Fund;
(g) the amount received under sub-section (4) of section 38;
(h) the application money received by companies for allotment of any
securities and due for refund;
(i) matured deposits with companies other than banking companies;
(j) matured debentures with companies;
(k) interest accrued on the amounts referred to in clauses (h) to (j);
(l) sale proceeds of fractional shares arising out of issuance of bonus
shares, merger and amalgamation for seven or more years;
(m) redemption amount of preference shares remaining unpaid or
unclaimed for seven or more years; and
(n) such other amount as may be prescribed:
Provided that no such amount referred to in clauses (h) to (j) shall form part
of the Fund unless such amount has remained unclaimed and unpaid for a
period of seven years from the date it became due for payment

Core areas Provisions

Utilization of the fund (3)(a) the refund in respect of unclaimed dividends, matured deposits,
matured debentures, the application money due for refund and interest
thereon;
(b) promotion of investors’ education, awareness and protection;
© distribution of any disgorged amount among eligible and identifiable
applicants for shares or debentures, shareholders, debenture-holders or
depositors who have suffered losses due to wrong actions by any person, in
accordance with the orders made by the Court which had ordered
disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits
under sections 37 and 245 by members, debenture-holders or depositors as

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 may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto,in accordance with such rules as
may be prescribed:
Provided that the person whose amounts referred to in clauses (a) to (d) of
sub-section (2) of section 205C transferred to Investor Education and
Protection Fund, after the expiry of the period of seven years as per
provisions of the Companies Act, 1956 (1 of 1956), shall be entitled to get
refund out of the Fund in respect of such claims in accordance with rules
made under this section.
Explanation.--The disgorged amount refers to the amount received through
disgorgement or disposal of securities.

Application for money (4) Any person claiming to be entitled to the amount referred in sub-
transferred to IEPF section (2) may apply to the authority constituted under sub-section (5)
for the payment of the money claimed.
CG shall establish (5) The Central Government shall constitute, by notification, an
Authority authority for administration of the Fund consisting of
 chairperson and
 such other members, not exceeding seven and
 chief executive officer, as the Central Government may appoint.
Administration of the (6) The manner of administration of the Fund, appointment of chairperson,
fund members and chief executive officer, holding of meetings of the authority
shall be in accordance with such rules as may be prescribed.
Officers and resources (7) The Central Government may provide to the authority such offices,
officers, employees and other resources in accordance with such rules as
may be prescribed.
Separate accounts of 8) The authority shall administer the Fund and maintain separate
the fund accounts and other relevant records in relation to the Fund in such form
as may be prescribed after consultation with the Comptroller and Auditor-
General of India.

Core areas Provisions

Utilization of fund (9) It shall be competent for the authority constituted under sub-section (5)
to spend money out of the Fund for carrying out the objects specified in sub-
section (3).

Audit of account by C & (10) The accounts of the Fund shall be audited by the Comptroller and
AG Auditor-General of India at such intervals as may be specified by him and
such audited accounts together with the audit report thereon shall be
forwarded annually by the authority to the Central Government.

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Report to cg on the fund (11) The authority shall prepare in such form and at such time for each
financial year as may be prescribed its annual report giving a full account of
its activities during the financial year and forward a copy thereof to the
Central Government and the Central Government shall cause the annual
report and the audit report given by the Comptroller and Auditor-General of
India to be laid before each House of Parliament.

RULE 3 TRANSFER OF SHARES

PHYSICAL DEMAT
SHARES SHARES
CO.TO ISSUE ADVERTISEMENT IN ENGLISH Yes Yes
AND VERNACULAR LANGUAGE

SIMULTANEOUSLY INFORM Yes Yes

SHAREHOLDERS PRIOR TO 3 MONTHS OF
TRANSFER
CO.TO AUTHORISED CS/OTHER PERSON TO Yes Yes
EXECUTE DOCUMENTS

Shares will be transferred toIEPFdemat account

NSDL Punjab national CDSL SBI

bank
CO. TO FILEIEPF-2 WITHIN 90DAYS OF AGM EVERY YEAR STATEMENT OF UNCLAIMED DIVIDEND AS ON
AGM DATE

SOME SHARES MAY NOT BE TRANSFERRED :- IEPF- 3

1. Where the court / tribunal / statutory authority has ordered not to transfer the shares
2. Shares pledged / hypothecated
Note 1:- for shares which are not transferred form iepf-3 within 30days from the end of financial year
Note 2:- for transfer of shares toIEPF:-formIEPF4

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 Investor Education and Protection Fund Authority(Accounting, Audit, Transfer and Refund)Second
Amendment Rules, 2019

“(1) Any amount required to be credited by the companies to the Fund as provided under clauses (a) to
(n) of sub-section (2) of section 125 of the Act shall be remitted online along with a Statement in Form
No. IEPF 1 containing details of such transfer to the Authority within a period of thirty days of such
amounts becoming due to be credited to the Fund.” ;

(ii) sub-rules (2), (3) and (4) shall be omitted ;

(iii) After sub-rule (4),the following sub-rule shall be inserted, namely:-

“(4A) The companies which have transferred any amount referred to in clauses (a) to (d) of sub-section
(2) of section 205C of the Companies Act, 1956 (1 of 1956) to Investor Education and Protection Fund
or Central Government, but have not filed the statement or have filed the statement in any format
other than in excel template, as required under sub-rule (1) of rule 5, shall submit details mentioned in
sub-rule (1) of rule 5 in Form No. IEPF – 1A along with excel template within sixty days of notification of
these amended rule.”;

(iv) in sub-rule (6), for clause (c), the following clause shall be substituted, namely:- “(c) The company
shall maintain the record filed under sub – rule (1) in the same format along with all supporting
documents and the Authority shall have the powers to inspect such records.”;

(v) for sub-rule (8), the following sub-rule shall be substituted, namely:-

“(8) Every company shall within a period of sixty days after the holding of Annual General Meeting or
the date on which it should have been held as per the provisions of section 96 of the Act, whichever is
earlier and every year thereafter till completion of the seven years period, identify the unclaimed
amounts, as referred in subsection (2) of section 125 of the Act, as on the date of closure of financial
year the account of which are to be adopted in the Annual General Meeting as per sub-section (1) of
section 137 of the Act, separately furnish and upload on its own website and also on website of
Authority or any other website as may be specified by the Government, a statement or information of
unclaimed and unpaid amounts separately for each of the previous seven financial years through Form
No. IEPF-2,

(5) While effecting such transfer, the company shall send a statement to the Authority in Form No.
IEPF-4 within thirty days of the corporate action taken under clause (c) of sub-rule (3) of rule 6
containing details of such transfer and the company shall also attach a copy of the public notice
published under clause (a) of sub-rule (3) of rule 6 in Form No IEPF-4.”.

(iv) for sub-rule (7), the following sub-rule shall be substituted, namely:-

“(7)The company shall maintain all such statements filed under sub – rule (5) in the same format along
with all supporting documents and the Authority shall have the powers to inspect such records.”;

(v) for sub-rule (8), the following sub-rule shall be substituted, namely:- “(8) All benefits accruing on

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such shares like bonus shares, split, consolidation, fraction shares and the like except right issue shall
also be credited to such DEMAT account [by the company which shall send a statement to the
Authority in Form No. IEPF-4 within thirty days of the corporate action containing details of such
transfer.]”.

6. In the Principle rules, in rule 7,

(i) for sub-rule (2), the following sub-rule shall be substituted, namely:- “(2) Upon submission, FormNo.
IEPF-5 shall be transmitted online to the Nodal Officer of the company for verification of claim:
Provided that the claimant after making an application in Form No. IEPF-5 under sub rule 1, shall send
original physical share certificate, original bond, deposit certificate, debenture certificate, as the case
may be, along with Indemnity Bond, Advance Receipts, any other document as enumerated in Form No.
IEPF-5, duly signed by him, to the Nodal Officer of the concerned company at its registered office for
verification of the claim.”;

(ii) for sub-rule (2A), following sub-rule shall be substituted, namely:-

“(2A) Every company which is required to credit amounts or shares to the fund or has deposited the
amount or transferred the shares to the Fund shall nominate a Nodal Officer, who shall either be a
Director or Chief financial Officer or Company Secretary of the company, for the purposes of
verification of claims and coordination with Investor Education and Protection Fund Authority:

Provided that a company may appoint one or more Officer as Deputy Nodal Officer to assist the Nodal
Officer for the purposes of verification of claim and for coordination with Investor Education and
Protection Fund Authority:
Provided further that the Nodal Officer shall be solely liable for all actions of any officer appointed as
Deputy Nodal Officer:

Provided also that in case a company fails to appoint Nodal Officer, every director of the company shall
be deemed to be nodal officer and be liable for any failure to comply with requirement of these rules.”;

(iii) after sub-rule (2A), the following sub-rule shall be inserted, namely:-
“(2B) The details of the Nodal Officerand Deputy Nodal Officerduly indicating his or her designation,
postal address, telephone and mobile number and company authorized e-mail ID shall be
communicated to the Investor Education and Protection Fund Authority in Form No. IEPF – 2 within
fifteen days from the date of publication of these rules and the company shall display the name of
Nodal Officer and his e-mail ID on its website:

Provided that any change in the Nodal Officer or his details shall be communicated to the Authority
through Form No. IEPF-2 within seven days of such change along with board resolution thereof.”;

(iv) for sub-rule (3), the following sub-ruleshall be substituted, namely:-

“(3) The company shall, within thirty days from the date of receipt of claim, send an online verification
report to the Authority after verification of details in Form No. IEPF-5 in the format specified by the
Authority along with all the documents submitted by the claimant and shall attach the scanned copy of

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all the original documents submitted by the claimant in physical form duly certified by its Nodal Officer
alongwith the e-verification report along with a scanned copy of both sides of original physical share
certificate or original bond or deposit or debenture certificate/s duly cancelled and certified:

Provided that if the online verification report is not sent by the company within thirty days of filing of
claim, the company may do so by paying additional feeof fifty rupees for every day subject to maximum
of two thousand and five hundred rupees:

Provided further that the company shall be liable to maintain the original documents submitted to it by
the claimant and shall produce such documents whenever required: Provided also that in case of non-
receipt of verification report along with documents by the Authority after the expiry of sixty days from
the date of filing of Form No. IEPF-5, the Authority may reject Form No. IEPF-5, after sending a
communication to the claimant and the concerned company, on the e-mail address of the claimant and
the company, to furnish response within a period of fifteen days:

Provided also that for failure to submit verification report of the claim in accordance with these rules,
the company and its Nodal Officer shall be punishable as per the provisions of the Act.

(v) for sub-rule (7), the following sub-rule shall be substituted, namely:-

“(7) Where the Authority, on examining any application for claim, finds it necessary to call for further
information or finds such application or e-form or document to be defective or incomplete in any
respect, the Authority shall give intimation of such information called for or defects or incompleteness,
by e-mail on the email address of the claimant and the company, which has filed such application or e-
form or document, directing him or it to furnish such information or to rectify such defects or
incompleteness or to re-submit such application or e-Form or document within fifteen days from the
date of receipt of such communication, failing which the Authority may reject the claim or e-form No.
IEPF-5:

Provided that if such information or incompleteness is called from the claimant, he shall file the e-form
and shall send such documents as called for within fifteen days, duly signed by him, to the Nodal Officer
of the concerned company at its registered office for verification of the claim and company shall send a
revised verification report:

Provided further that if any such information or incompleteness is called from the company, the
company shall file the revised verification report and shall send such documents as called for within
thirty days:

Provided also that the provisions of sub-rule (3) of rule 7 shall apply mutatis mutandis to this sub-
Rule.”; (vi) for sub-rule (8), the following shall be substituted, namely:-

“(8) In case, claimant is a legal heir or successor or administrator or nominee of the registered share
holder, the claimant shall ensure to submission of self-attested scanned copy of all documents detailed
in Schedule II of these rules online along with the Form No. IEPF-5:

Provided that in case of loss of securities held in physical form, he has to ensure to submission of self-
attested scanned copy of additional documents detailed in Schedule III of these rules online along with

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the Form No. IEPF-5:

Provided further that the claimant shall submit in original all these documents duly signed by him, to the
Nodal Officer of the concerned company at its registered office for verification of the claim.”;

(vii) in sub-rule (9), after the words “the claim of such claimant”, the following shall be inserted,
namely:- “through its e-verification report:

Provided that the authority shall dispose such request of transfer or transmission based on the e-
verification report of the company subject to verification of such request.”;

(ix) in sub-rule (11), after clause (a), the following clause shall be inserted, namely:-

“(b)Any fraudulent claim by the claimant shall be deemed to be fraud within the meaning of section 447 of
the Act and the claimant shall be liable accordingly.

(c) If any person deceitfully personates an owner of any security or of any share warrant or coupon
issued in pursuance of this Act and thereby files any claim to obtain or attempts to obtain any such
security or interest or any such warrant or coupon due to the lawful owner, he shall be punishable
under sections 57, 447 and 448 of the Act.”.

INVESTOR ASSOCIATIONS:
SEBI as a part of undertaking various investor awareness and education activities, has recognised
organisations working in the area of investor education / awareness, conducting awareness workshops
and rendering assistance to individuals/investors in the area of grievance redressal as “Investors’
Associations”.
The Investors’ Association shall conduct workshops under SEBI IEPF in the state in which their registered
office is located subject to prior approval from the respective SEBI office at least 5 working days prior to
date of the workshop. The Investors’ Associations are eligible to claim reimbursement of the expenses
incurred from SEBI subject to the conditions specified.

PROTECTION OF RIGHTS OF MINORITY SHAREHOLDERS

OECD PRINCIPLES: The corporate governance framework should protect and facilitate the exercise
of shareholders’ rights and ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders
should have the opportunity to obtain effective redress for violation of their rights.

COMPANIES ACT Oppression and Mismanagement(SECTION 241-244)

,2013:

SECTION 241
APPLICATION TO TRIBUNAL FOR RELIEF CASES OF OPPRESSION, ETC:

(1) Any member of a company who complains that—

(a) the affairs of the company have been or are being conducted in a manner prejudicial to public
interest or in a manner prejudicial or oppressive to him or any other member or members or in a

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 manner prejudicial to the interests of the company;
or
(b) the material change, not being a change brought about by, or in the interests of, any creditors,
including debenture holders or any class of shareholders of the company, has taken place in the
management or control of the company, whether by an alteration in the Board of Directors, or
manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership,
or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of
the company will be conducted in a manner prejudicial to its interests or its members or any class of
members, may apply to the Tribunal, provided such member has a right to apply under section 244,
for an order under this Chapter.
(2) The Central Government, if it is of the opinion that the affairs of the company are being conducted in a
manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter.
In section 241 of the principal Act,—
(a) in sub-section (2), the following proviso shall be inserted, namely:— “Provided that the applications
under this sub-section, in respect of such company or class of companies, as may be prescribed, shall
be made before the Principal Bench of the Tribunal which shall be dealt with by such Bench.”;
(b) aGer sub-section (2), the following sub-sections shall be inserted, namely:— “
(3) Where in the opinion of the Central Government there exist circumstances suggesting that––
(a) any person concerned in the conduct and management of the affairs of a company is or has been in
connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out
his obligations and functions under the law or of breach of trust;
(b) the business of a company is not or has not been conducted and managed by such person in
accordance with sound business principles or prudent commercial practices;
(c) a company is or has been conducted and managed by such person in a manner which is likely to
cause, or has caused, serious injury or damage to the interest of the trade, industry or business to
which such company pertains; or
(d) the business of a company is or has been conducted and managed by such person with intent
to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful
purpose or in a manner prejudicial to public interest, the Central Government may initiate a case
against such person and refer the same to the Tribunal with a request that the Tribunal may inquire
into the case and record a decision as to whether or not such person is a fit and proper person to
hold the office of director or any other office connected with the conduct and management of any
company.
(4) The person against whom a case is referred to the Tribunal under sub-section (3), shall be joined as a
respondent to the application.
(5) Every application under sub-section (3)––
(a) shall contain a concise statement of such circumstances and materials as the Central Government
may consider necessary for the purposes of the inquiry; and
(b) shall be signed and verified in the manner laid down in the Code of Civil Procedure, 1908, for the
signature and verification of a plaint in a suit by the Central Government.”.

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 Section 242 POWERS OF TRIBUNAL

(1) If, on any application made under section 241, the Tribunal is of the opinion—
(a) that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive
to any member or members or prejudicial to public interest or in a manner prejudicial to the interests
of the company; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise
the facts would justify the making of a winding-up order on the ground that it was just and equitable
that the company should be wound up, the Tribunal may, with a view to bringing to an end the
matters complained of, make such order as it thinks fit.
(2) Without prejudice to the generality of the powers under sub-section (1), an order under that sub-section
may provide for—
(a) the regulation of conduct of affairs of the company in future;
(b) the purchase of shares or interests of any members of the company by other members thereof or by
the company;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its
share capital;
(d) restrictions on the transfer or allotment of the shares of the company;
(e) the termination, setting aside or modification, of any agreement, howsoever arrived at, between the
company and the managing director, any other director or manager, upon such terms and conditions
as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;
(f) the termination, setting aside or modification of any agreement between the company and any
person other than those referred to in clause (e):
Provided that no such agreement shall be terminated, set aside or modified except a†er due notice
and a†er obtaining the consent of the party concerned;
(g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to
property made or done by or against the company within three months before the date of the
application under this section, which would, if made or done by or against an individual, be deemed
in his insolvency to be a fraudulent preference;
(h) removal of the managing director, manager or any of the directors of the company;
(i) recovery of undue gains made by any managing director, manager or director during the period of
his appointment as such and the manner of utilisation of the recovery including transfer to Investor
Education and Protection Fund or repayment to identifiable victims;
(j) the manner in which the managing director or manager of the company may be appointed subsequent
to an order removing the existing managing director or manager of the company made under clause
(h);
(k) appointment of such number of persons as directors, who may be required by the Tribunal to
report to the Tribunal on such ma†ers as the Tribunal may direct;
(l) imposition of costs as may be deemed fit by the Tribunal;
(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision
should be made.

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(3) A certified copy of the order of the Tribunal under sub-section (1) shall be filed by the company with the
Registrar within thirty days of the order of the Tribunal.

(4) The Tribunal may, on the application of any party to the proceeding, make any interim order which it
thinks fit for regulating the conduct of the company’s affairs upon such terms and conditions as appear to
it to be just and equitable.

In section 242 of the principal Act, aGer sub-section (4), the following sub-section shall be inserted,
namely:–– “(4A) At the conclusion of the hearing of the case in respect of sub-section (3) of section 241,
the Tribunal shall record its decision stating therein specifically as to whether or not the respondent is a
fit and proper person to hold the office of director or any other office connected with the conduct and
management of any company.”.

(5) Where an order of the Tribunal under sub-section (1) makes any alteration in the memorandum or articles
of a company, then, notwithstanding any other provision of this Act, the company shall not have power,
except to the extent, if any, permitted in the order, to make, without the leave of the Tribunal, any alteration
whatsoever which is inconsistent with the order, either in the memorandum or in the articles.

(6) Subject to the provisions of sub-section (1), the alterations made by the order in the memorandum or
articles of a company shall, in all respects, have the same effect as if they had been duly made by the
company in accordance with the provisions of this Act and the said provisions shall apply accordingly to
the memorandum or articles so altered.

(7) A certified copy of every order altering, or giving leave to alter, a company’s memorandum or articles, shall
within thirty days aGer the making thereof, be filed by the company with the Registrar who shall register
the same.

(8) If a company contravenes the provisions of sub-section (5), the company shall be punishable with fine
which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every
officer of the company who is in default shall be punishable with imprisonment for a term which may
extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may
extend to one lakh rupees, or with both.

Section 243 CONSEQUENCE OF TERMINATION OR MODIFICATION OF CERTAIN AGREEMENTS.

(1) Where an order made under section 242 terminates, sets aside or modifies an agreement such as is
referred to in sub-section (2) of that section,—
(a) such order shall not give rise to any claims whatever against the company by any person for damages
or for compensation for loss of office or in any other respect either in pursuance of the agreement or
otherwise;
In section 243 of the principal Act,–– (a) aGer sub-section (1), the following sub-sections shall be
inserted, namely:— “
(1A) The person who is not a fit and proper person pursuant to sub-section (4A) of section 242 shall
not hold the office of a director or any other office connected with the conduct and management of
the affairs of any company for a period of five years from the date of the said decision:
Provided that the Central Government may, with the leave of the Tribunal, permit such person to
hold any such office before the expiry of the said period of five years.
(1B) Notwithstanding anything contained in any other provision of this Act, or any other law for the
time being in force, or any contract, memorandum or articles, on the removal of a person from the

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 office of a director or any other office connected with the conduct and management of the affairs
of the company, that person shall not be entitled to, or be paid, any compensation for the loss or
termination of office.”;
(b) in sub-section (2), aGer the word, brackets and figure “sub-section (1)”, the words, brackets, figure
and letter “or sub-section (1A)”
(c) no managing director or other director or manager whose agreement is so terminated or set aside
shall, for a period of five years from the date of the order terminating or setting aside the agreement,
without the leave of the Tribunal, be appointed, or act, as the managing director or other director or
manager of the company:
Provided that the Tribunal shall not grant leave under this clause unless notice of the intention to
apply for leave has been served on the Central Government and that Government has been given a
reasonable opportunity of being heard in the matter.
(2) Any person who knowingly acts as a managing director or other director or manager of a company in
contravention of clause (b) of sub-section (1), and every other director of the company who is knowingly
a party to such contravention, shall be punishable with imprisonment for a term which may extend to six
months or with fine which may extend to five lakh rupees, or with both.

RIGHT TO APPLY UNDER SECTION 241:

Section 244
1) The following members of a company shall have the right to apply under section 241, namely:—
(a) in the case of a company having a share capital, not less than one hundred members of the company
or not less than one-tenth of the total number of its members, whichever is less, or any member
or members holding not less than one-tenth of the issued share capital of the company, subject to
the condition that the applicant or applicants has or have paid all calls and other sums due on his or
their shares;
(b) in the case of a company not having a share capital, not less than one-ޠh of the total number of
its members:
Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the
requirements specified in clause (a) or clause (b) so as to enable the members to apply under section
241.
Explanation.—For the purposes of this sub-section, where any share or shares are held by two or more
persons jointly, they shall be counted only as one member.
(2) Where any members of a company are entitled to make an application under subsection (1), any one or
more of them having obtained the consent in writing of the rest, may make the application on behalf and
for the benefit of all of them.

CLASS ACTION:
Section 245
(1) Such number of member or members, depositor or depositors or any class of them, as the case may be,
as are indicated in sub-section (2) may, if they are of the opinion that the management or conduct of the
affairs of the company are being conducted in a manner prejudicial to the interests of the company or its
members or depositors, file an application before the Tribunal on behalf of the members or depositors for
seeking all or any of the following orders, namely:—
(a) To restrain the company from committing an act which is ultra vires the articles or memorandum of
the company;
(b) To restrain the company from commiUng breach of any provision of the company’s memorandum
or articles;

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 (c) to declare a resolution altering the memorandum or articles of the company as void if the resolution
was passed by suppression of material facts or obtained by mis-statement to the members or
depositors;
(d) To restrain the company and its directors from acting on such resolution;
(e) To restrain the company from doing an act which is contrary to the provisions of this Act or any
other law for the time being in force;
(f) To restrain the company from taking action contrary to any resolution passed by the members;
(g) to claim damages or compensation or demand any other suitable action from or against—
(i) the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct
or any likely act or omission or conduct on its or their part;
(ii) the auditor including audit firm of the company for any improper or misleading statement of
particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct;
or
(iii) any expert or advisor or consultant or any other person for any incorrect or misleading statement
made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act
or conduct on his part;
(h) to seek any other remedy as the Tribunal may deem fit.
(2) Where the members or depositors seek any damages or compensation or demand any other suitable
action from or against an audit firm, the liability shall be of the firm as well as of each partner who was
involved in making any improper or misleading statement of particulars in the audit report or who acted
in a fraudulent, unlawful or wrongful manner.
(3) (i) The requisite number of members provided in sub-section (1) shall be as under:—
(a) in the case of a company having a share capital, not less than one hundred members of the
company or not less than such percentage of the total number of its members as may be
prescribed, whichever is less, or any member or members holding not less than such percentage
of the issued share capital of the company as may be prescribed, subject to the condition that
the applicant or applicants has or have paid all calls and other sums due on his or their shares;
(b) in the case of a company not having a share capital, not less than one-ޠh of the total number
of its members.
(ii) The requisite number of depositors provided in sub-section (1) shall not be less than one hundred
depositors or not less than such percentage of the total number of depositors as may be prescribed,
whichever is less, or any depositor or depositors to whom the company owes such percentage of
total deposits of the company as may be prescribed.
(4) In considering an application under sub-section (1), the Tribunal shall take into account, in particular—
(a) Whether the member or depositor is acting in good faith in making the application for seeking an
order;
(b) Any evidence before it as to the involvement of any person other than directors or officers of the
company on any of the matters provided in clauses (a) to (f) of subsection (1);
(c) Whether the cause of action is one which the member or depositor could pursue in his own right
rather than through an order under this section;
(d) Any evidence before it as to the views of the members or depositors of the company who have no
personal interest, direct or indirect, in the matter being preceded under this section;

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 (e) Where the cause of action is an act or omission that is yet to occur, whether the
act or omission could be, and in the circumstances would be likely to be—
(i) Authorized by the company before it occurs; or
(ii) Ratified by the company aGer it occurs;
(f) Where the cause of action is an act or omission that has already occurred,
whether the act or omission could be, and in the circumstances would be likely
to be, ratified by the company.
(5) If an application filed under sub-section (1) is admitted, then the Tribunal shall have
regard to the following, namely:—
(a) Public notice shall be served on admission of the application to all the
members or depositors of the class in such manner as may be prescribed;
(b) all similar applications prevalent in any jurisdiction should be consolidated
into a single application and the class members or depositors should be
allowed to choose the lead applicant and in the event the members or
depositors of the class are unable to come to a consensus, the Tribunal shall
have the power to appoint a lead applicant, who shall be in charge of the
proceedings from the applicant’s side;
(c) Two class action applications for the same cause of action shall not be allowed;
(d) The cost or expenses connected with the application for class action shall be
defrayed by the company or any other person responsible for any oppressive
act.
(6) Any order passed by the Tribunal shall be binding on the company and all its
members, depositors and auditor including audit firm or expert or consultant or
advisor or any other person associated with the company.
(7) Any company which fails to comply with an order passed by the Tribunal under this
section shall be punishable with fine which shall not be less than five lakh rupees
but which may extend to twenty-five lakh rupees and every officer of the company
who is in default shall be punishable with imprisonment for a term which may
extend to three years and with fine which shall not be less than twenty-five
thousand rupees but which may extend to one lakh rupees.
(8) Where any application filed before the Tribunal is found to be frivolous or
vexatious, it shall, for reasons to be recorded in writing, reject the application and
make an order that the applicant shall pay to the opposite party such cost, not
exceeding one lakh rupees, as may be specified in the order.
(9) Nothing contained in this section shall apply to a banking company.
(10) Subject to the compliance of this section, an application may be filed or any other
action may be taken under this section by any person, group of persons or any
association of persons representing the persons affected by any act or omission,
specified in sub-section (1).
Section 246 APPLICATION OF CERTAIN PROVISIONS TO PROCEEDINGS UNDER SECTION 241 OR
SECTION 245:
The provisions of sections 337 to 341 (both inclusive) shall apply mutatis mutandis, in
relation to an application made to the Tribunal under section 241 or section 245.

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TOOLS USED BY INSTITUTIONAL INVESTORS:
The Institutional Investors use different tools to assess the health of Company before investing
resources in it. Some of the important tools are discussed as under:
One-to-one The meetings between institutional investors and companies are extremely
meetings: important as a means of communication between the two parties. A
company will usually arrange to meet with its largest institutional investors
on a one-to-one basis during the course of the year.

Voting: The right to vote can be seen as fundamental tools for some element of
control by shareholders .They should use their power judiciously. The
institutional investors can register their views by postal voting, or, vote
electronically where this facility is available.
Focus list: A number of institutional investors have established ‘focus lists’ whereby
they target underperforming companies and include them on a list of
companies which have underperformed a main index, such as Standard and
Poor’s.
Corporate With the increasing emphasis on corporate governance across the globe, it is
governance perhaps not surprising that a number of corporate governance rating
rating systems have been developed. Examples of such firms which have developed
systems: corporate governance rating systems are Deminor, Standard and Poor’s, and
Governance Metrics International (GMI). A corporate governance rating
could be a powerful indicator of the extent to which a company currently is
adding, or has the potential to add in the future,
shareholder value.

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UK Stewardship Code
OBJECTIVE: The Stewardship Code is a part of UK company law concerning principles
that institutional investors are expected to follow .Its principal aim is to
make institutional investors ,who manage other people money ,be active
and engage in corporate governance in the interest of their beneficiaries.
For investors, stewardship is more than just voting. Activities may include
monitoring and engaging with companies on matters such as strategy,
performance, risk, capital structure, and corporate governance, including
culture and remuneration. Engagement is purposeful dialogue with
companies on these matters as well as on issues that are the immediate
subject of votes at general meetings.
PRINCIPLES: 1. Publicly disclose their policy on how they will discharge their
stewardship responsibilities.
2. Have a robust policy on managing conflicts of interest in relation to
stewardship which should be publicly disclosed.
3. Monitor their investee companies.
4. Establish clear guidelines on when and how they will escalate their
stewardship activities.
5. Be willing to act collectively with other investors where
appropriate.
6. Have a clear policy on voting and disclosure of voting activity.
7. Report periodically on their stewardship and voting activities.

Principles for Responsible Investment (PRI)

1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which they invest.

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 4. We will promote acceptance and implementation of the Principles within the investment
industry.
5. We will work together to enhance effectiveness in implementing the Principles.
6. We will each report on their activities and progress towards implementing the Principles.

Code for Responsible Investing in South Africa (CRISA):

The Code for Responsible Investing in South Africa (CRISA) gives guidance on how the institutional
investor should execute investment analysis and investment activities and exercise rights so as to
promote sound governance.
APPLICABLE: CRISA applies to:
 Institutional investors as asset owners, for example, pension funds
and insurance companies.
 Service providers of institutional investors, for example, asset and
fund managers and consultants.

PRINCIPLES: 1. An institutional investor should incorporate sustainability

considerations, including ESG, into its investment analysis and
investment activities as part of the delivery of superior risk-adjusted
returns to the ultimate beneficiaries.
2. An institutional investor should demonstrate its acceptance of
ownership responsibilities in its investment arrangements and
investment activities.
3. Where appropriate, institutional investors should consider a
collaborative approach to promote acceptance and implementation
of the principles of CRISA and other codes and standards applicable
to institutional investors.
4. An institutional investor should recognise the circumstances and
relationships that hold a potential for conflicts of interest and
should pro-actively manage these when they occur.
5. Institutional investors should be transparent about the content of
their policies, how the policies are implemented and how CRISA is
applied to enable stakeholders to make informed assessments.

California Public Employees’ Retirement System:

The California Public Employees’ Retirement System (CalPERS, System) is the largest U.S. public
pension fund, with assets totaling approximately $300 billion spanning domestic and international
markets as of June 30, 2014.
MISSION: Its mission is to provide responsible and efficient stewardship of the
System to deliver promised retirement and health benefits, while
promoting wellness and retirement security for members and beneficiaries.

PRINCIPLES:  Sustainability
 Director Accountability
 Transparency

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  One-share/One-vote
 Proxy Materials
 Code of Best Practices
 Long-term Vision
 Access to Director Nominations
 Political Stability

DEALING WITH INSTITUTIONAL INVESTORS:

The relationship between companies and their investors both individual and institutional is very
crucial. Companies should consider implementing the following practices, while dealing with
institutional investors.:
 Preparing (in advance) materials articulating positions vis-à-vis significant issues to be
submitted to a shareholder vote, addressing major rationales supporting a view contrary to
the views the public company intends to espouse.
 Contemporaneously documenting proxy services firm responses to meeting requests, as well
as substantive discussions at any meeting.
 Formally requesting that proxy services firms provide previews of recommendations they
anticipate making vis-à-vis issues to be submitted to public company shareholders for a
vote.
 Monitoring proxy services firm recommendations for accuracy or reliance on outdated
information.

ROLE OF PROXY ADVISORY FIRMS:

 Proxy advisors generally offer variety of services consisting of both, analyzing the proposals
at general meetings and recommending voting decisions.
 The recommendations of proxy advisors help the investors to obtain a more considered
understanding of different agenda items and to arrive at an informed voting decision,
allowing them to optimise their own limited resources and cast their votes in a timely and
informed manner.
 The proxy advisors can assist in mitigating the language issues as well. Further, they may also
enable the investors to have a voting platform in cases where electronic voting is a pre-
requisite at general meetings.
 Proxy advisers also influence boards’ decision making. They do a good job of policing the
boards and governance records of the firms they track, and nudging institutional investors to
take a stand on governance issues.

GOVERNANCE OF GROUP ENTITIES/ SUBSIDIARIES

To protect the interest of shareholders of holding company and minority shareholders of subsidiary
certain provisions have been put in place both by the Companies Act, 2013 and SEBI (LODR).
 At least one independent director on the board of directors of the listed company shall be a
director on the board of directors of any unlisted material subsidiaries including foreign
companies.

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  The minutes of the meetings of the board of directors of the unlisted subsidiary shall be placed
at the meeting of the board of directors of the listed company.
 The management of the unlisted subsidiary shall periodically bring to the notice of the board of
directors of the listed company, a statement of all significant transactions and arrangements
entered into by the unlisted subsidiary.
 The statutory auditor of a listed entity shall undertake a limited review of the audit of all the
entities/ companies whose accounts are to be consolidated with the listed entity. Besides
audited annual consolidated statements at least eighty percent of the quarterly consolidated
financial results, of each of the consolidated revenue, assets and profits, respectively, shall have
been audited or subjected to limited review. (Regulation 33)
 The audit committee of the listed company shall also review the financial statements, of
subsidiaries in particular, the investments made by the unlisted subsidiary. (Regulation 24) The
board of a holding company can authorize anyone to Inspection of books of account of any
subsidiary company. (Section 128)
 The listed company shall not dispose of shares in its material subsidiary which would reduce its
shareholding (either on its own or together with other subsidiaries) to less than 50% or cease
the exercise of control over the subsidiary without passing a special resolution in its General
Meeting. Exception has been granted for divestment under a scheme of arrangement duly
approved by a court/ tribunal. (Regulation 24)
 Every listed entity’s material unlisted subsidiaries incorporated in India shall undertake
secretarial audit and shall annex the report with its annual report. (Regulation 24A) This will
help improve compliance of group as a whole.

EXPLANATION:

Significant transaction or arrangement” shall mean any individual transaction or arrangement that
exceeds or is likely to exceed ten percent (10%) of the total revenues or total expenses or total assets
or total liabilities, as the case may be, of the unlisted material subsidiary for the immediately preceding
accounting year. (Regulation 24).

CORPORATE GOVERNANCE IN FAMILY OWNED ENTERPRISES

Certain provisions of Corporate Governance in a Family Owned Companies have been actively
statutorily incorporated in the Companies Act, 2013 such as:

 Independent Directors and Women Directors : To build up the transparency and

accountability of the Board of Directors, the Act now requires at least 1/3rd of the total
directors of a listed company to be Independent Directors and have no material or pecuniary
relationship with the company or related persons. Public companies with paid up share
capital exceeding Rs. 10 Crores or turnover exceeding Rs. 100 crore are statutorily required
to have at least 2 directors as Independent Directors. To ensure diversity on the board, all
listed companies and non-listed companies having paid up share capital more than Rs. 100
Crores and turnover exceeding Rs. 100 Crores are required to have at least one woman
director on the board.

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  Corporate Social Responsibility : Every company having net worth of Rs. 500 Crores or more,
turnover exceeding Rs. 1000 Crores or net profit of more than Rs. 5 Crore is required to
constitute a Corporate Social Responsibility Committee under Section 135 of the Companies
Act, 2013 constituting 3 or more directors with at least 1 Independent Director to formulate
policies and recommend activities that the company may undertake for promotion of
education, gender equality, health, poverty eradication, environment, employment etc. Again,
this measure puts responsibility on the company for the social wellbeing not just of its
workforce, but also makes it publicly accountable.

 Audit Committee : The Act provides for the setting up of an Audit Committee comprising of at
least 3 directors by all listed companies, majority of which have to be independent
directors. The members of such a committee have to be persons who can read and
understand financial statements and the task entrusted to such a committee is
recommending remuneration and appointments of auditors and reviewing their
independence.

 Nomination and Remuneration Committee : The Nomination and Remuneration committee

shall comprise of 3 or more non-executive directors out of which at least half shall be
Independent Directors. Such committee shall identify persons qualified to become directors
of the company and make recommendations to the board of directors regarding their
appointment and approval.

 Serious Fraud Investigation Office : Section 211 of the Act provides for the establishment of a
Serious Fraud Investigation Office to look into the affairs of the company and investigate
incidences of fraud upon receipt of report of the Registrar or inspector or generally in the
public interest or request from any Department of Central or State Government.

Some Unique challenges/ Governance issues of family businesses:

 Managing the diverse opinions of family members in the business, solving internal issues and
disputes, etc is a challenge.
 Investors – both shareholders and creditors – may look with distrust on family-controlled
companies, because of the risk that the controlling family may abuse the rights of other
shareholders. So investors likely to scrutinize such companies with care before taking the
plunge and investing.
 Hiring external staff which may perceive that career advancement, freedom and decision-
making are solely the purview of family.
 Change in mind-set: Differing views between the older generation and the newer generation
 Lack of Competitiveness.

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 SOME EXAMINATION QUESTIONS

1. Discuss about the provisions for protection of shareholder rights?

2. What are the tools that an institutional investor can use to assess the health of a company?
3. Discuss the major principles of UK Stewardship code?
4. Write a short note on IEPF.
5. Discuss the salient features of CalPERS. What are the main drivers of their corporate
engagement programme ?
6. Write a note on Oppression and mismanagement.
7. What is the role of Proxy advisory firms?
8. Short note: Material Subsidiary.

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 CHAPTER 9

Corporate Governance and Other Stakeholders

“Stakeholder Theory” “Stakeholder Theory is an idea about how business really works. It says that
for any business to be successful it has to create value for customers,
suppliers, employees, communities and financiers, shareholders, banks and
others people with the money. It says that you can’t look at any one of their
stakes or stakeholders if you like, in isolation. Their interest has to go
together, and the job of a manager or entrepreneur is to work out how the
interest of customers, suppliers, communities, employees and financiers go
in the same direction.

RECOGNITION OF Under the UK Companies Act, 2006: Section 172: Duty to promote the
STAKEHOLDER success of the company:
CONCEPT IN LAW ( UK A director of a company must act in the way he considers, in good faith,
& INDIA) would be most likely to promote the success of the company for the benefit
of its members as a whole, and in doing so have regard (amongst other
matters) to
 the likely consequences of any decision in the long term,
 the interests of the company’s employees,
 the need to foster the company’s business relationships with
suppliers, customers and others,
 the need to act fairly as between members of the company

Under the Indian Companies Act, 2013:

Section 135 Corporate Social Responsibilities: Every company having net
worth of rupees five hundred crore or more, or turnover of rupees one
thousand crore or more or a net profit of rupees five crore or more during
any financial year shall constitute a Corporate Social Responsibility
Committee of the Board consisting of three or more directors, out of which

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 at least one director shall be an independent director.
 Section 166(2) Duties of the Directors: A director of a company shall
act in good faith in order to promote the objects of the company
for the benefit of its members as a whole, and in the best interests
of the company, its employees, the shareholders, the community
and for the protection of environment.
 Role and Functions of Independent Directors.

Under the Principles articulated under SEBI (LODR) Regulations, 2015:

 Stakeholders should have the opportunity to obtain effective

redress for violation of their rights.
 The listed entity should devise an effective whistle blower
mechanism enabling stakeholders, including individual employees
and their representative bodies, to freely communicate their
concerns about illegal or unethical practices.

STAKEHOLDER Stakeholder engagement is the process by which an organisation involves

ENGAGEMENT people who may be affected by the decisions it makes or can influence the
implementation of its decisions. Stakeholder engagement
 identifies stakeholders
 assesses stakeholder needs
 develops stakeholder relations plans and forms alliances with
stakeholders.

Stakeholder engagement leads to increased transparency, responsiveness,

compliance, organizational learning, quality management, accountability
and sustainability. Stakeholder engagement is a central feature of
sustainability performance. Stakeholder engagement is undertaken for
numerous reasons which include:
 Improved corporate responsibility and financial performance
across the globe.
 To avoid conflict through negotiation, mediation and collaborative
learning.
 Development of a shared vision to direct future business decisions
and operations.
 To innovate through collaboration.

Stakeholder engagement involves following steps:

 Identify stakeholder
 Establish the goals and objectives of the company for engagement.
 Identify stakeholder needs and interests.
 Determine the stakeholder engagement strategy.
 Evaluate outcome and internalize learnings.

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 Key principles of Stakeholder engagement:
 Communicate
 Consult
 Compromise
 Remember, they are human
 Relationship
 Take responsibility
 Simple but not easy
 Managing risk.
STAKEHOLDER Stakeholder analysis is the identification of a project’s/activity’s key
ANALYSIS stakeholders, an assessment of their interests, and the ways in which these
interests affect project riskiness and viability.
A stakeholder analysis of an issue consists of weighing and balancing all of
the competing demands on a firm by each of those who have a claim on it, in
order to arrive at the firm’s obligation in a particular case. A stakeholder
analysis does not preclude the interests of the stakeholders overriding the
interests of the other stakeholders affected, but it ensures that all affected
will be considered.

Doing a stakeholder analysis can:

 draw out the interests of stakeholders in relation to the problems
which the project is seeking to address (at the identification stage) or
the purpose of the project (once it has started)
 identify conflicts of interests between stakeholders
 help to identify relations between stakeholders which can be built
upon, and may enable establish synergies
 help to assess the appropriate type of participation by different
stakeholders.
BETTER The following are just some of the different roles that stakeholders can
STAKEHOLDER play:
ENGAGEMENT
ENSURES GOOD  Experts, such as academics, who have been invited to contribute
GOVERNANCE knowledge and strategic advice to the company’s board;
 Technical advisors with expertise on the social and environmental
risks associated with particular technological and scientific
developments invited to sit on scientific and ethical panels in
science-based industries;
 Co-implementers, such as NGOs, who have partnered with the
company to implement a joint solution or program to address a
shared challenge.
TYPES OF The concept of stakeholders may be classified into Primary and Secondary
STAKEHOLDERS Stakeholders:
 Primary stakeholders are those whose continued association is
absolutely necessary for a firm’s survival; these include employees,
customers, investors, and shareholders, as well as the governments

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 and communities that provide necessary infrastructure.

 Secondary stakeholders do not typically engage in transactions with

a company and thus are not essential for its survival; these include
the media, trade associations, and special interest groups.

Both primary and secondary stakeholders embrace specific values and

standards that dictate what constitutes acceptable or unacceptable
corporate behaviors. While primary groups may present more day-to- day
concerns, secondary groups cannot be ignored or given less consideration in
the ethical decision- making process.

THE CAUX ROUND  The Caux Round Table (CRT) is an international network of business
TABLE leaders working to promote a morally and sustainable way of doing
business. The CRT believes that its Principles for Responsible
Business provide necessary foundations for a fair, free and
transparent global society.

 The Caux Round Table was founded in1986 by Frits Philips Sr,
former President of Philips Electronics.

 The CRT began to focus attention on the importance of global

corporate responsibility in reducing social and economic threats to
world peace and stability.

 Caux Round Table Principles for Business around three ethical

foundations, namely
 responsible stewardship;
 the Japanese concept of Kyosei
 living and working for mutual advantage; and respecting
and protecting human dignity.
The CRT Principles for 1. PRINCIPLE 1 - RESPECT STAKEHOLDERS BEYOND SHAREHOLDERS
Responsible Business 2. PRINCIPLE 2 – CONTRIBUTE TO ECONOMIC, SOCIAL AND
ENVIRONMENTAL DEVELOPMENT
3. PRINCIPLE 3 – BUILD TRUST BY GOING BEYOND THE LETTER OF THE
LAW
4. PRINCIPLE 4 –RESPECT RULES AND CONVENTIONS
5. PRINCIPLE 5 – SUPPORT RESPONSIBLE GLOBALISATION
6. PRINCIPLE 6 – RESPECT THE ENVIRONMENT
7. PRINCIPLE 7 – AVOID ILLICIT ACTIVITIES

CRT Stakeholder key stakeholders are dependent on business for their well-being and
Management prosperity. They are the beneficiaries of ethical business practices.
Guidelines

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1. Customers: A responsible business treats its customers with respect
and dignity. Business therefore has a responsibility to:
 Provide customers with the highest quality products and
services consistent with their requirements.
 Ensure that the health and safety of customers is protected.
 Protect customers from harmful environmental impacts of
products and services.

2. Employees: A responsible business treats every employee with

dignity and respects their interests. Business therefore has a
responsibility to:
 Provide jobs and compensation that contribute to improved
living standards
 Provide working conditions that protect each employee’s
health and safety.
 Avoid illicit or abusive child labor practices.

3. Shareholders: A responsible business acts with care and loyalty

towards its shareholders and in good faith for the best interests of
the corporation. Business therefore has a responsibility to:
 Disclose relevant information to shareholders, subject only
to legal requirements and competitive constraints.
 Conserve, protect, and increase shareholder wealth.
 Respect shareholder views, complaints, and formal
resolutions.

4. Suppliers: A responsible business treats its suppliers and

subcontractors with fairness, truthfulness and mutual respect.
Business therefore has a responsibility to:
 Ensure that business supplier and subcontractor activities
are free from coercion and threats.
 Share information with suppliers and integrate them into
business planning.

5. Competitors:
 Foster open markets for trade and investment.
 Respect both tangible and intellectual property rights.
 Refuse to acquire commercial information through
dishonest or unethical means, such as industrial espionage.

6. Communities:

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  Respect human rights and democratic institutions, and
promote them wherever practicable.
 Support peace, security and the rule of law.
 Respect social diversity including local cultures and minority
communities.
 Be a good corporate citizen through ongoing community
investment and support for employee participation in
community and civic affairs.

THE CLARKSON Principle 1 : Managers should acknowledge and actively monitor the
PRINCIPLES OF concerns of all legitimate stakeholders, and should take their interests
STAKEHOLDER appropriately into account in decision-making and operations.
MANAGEMENT
Principle 2: Managers should listen to and openly communicate with
stakeholders about their respective concerns and contributions, and about
the risks that they assume because of their involvement with the
corporation.

Principle 3: Managers should adopt processes and modes of behavior that

are sensitive to the concerns and capabilities of each stakeholder
constituency.

Principle 4: Managers should recognize the interdependence of efforts and

rewards among stakeholders, and should attempt to achieve a fair
distribution of the benefits and burdens of corporate activity among them,
taking into account their respective risks and vulnerabilities.

Principle 5: Manages should work cooperatively with other entities, both

public and private, to insure that risks and harms arising from corporate
activities are minimized and, where they cannot be avoided, appropriately
compensated.

Principle 6: Managers should avoid altogether activities that might

jeopardize inalienable human rights (e.g., the right to life) or give rise to
risks which, if clearly understood, would be patently unacceptable to
relevant stakeholders.

Principle 7: Managers should acknowledge the potential conflicts between

 their own role as corporate stakeholders, and

 their legal and moral responsibilities for the interests of
stakeholders, and

should address such conflicts through open communication, appropriate

reporting and incentive systems, and, where necessary, third party review

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GOVERNANCE 1. Employees: Following are the some important example for ensuring
PARADIGM AND good governance by employees:
VARIOUS  Right to consultation
STAKEHOLDERS
 Right to nominate/vote for supervisory board members
 Participation in the capital:
 Profit sharing
 Whistle Blower Policy

2. Customers: The business activity runs around the customer. There is

a maxim ‘Caveat Emptor’ means let the buyer beware. However, to
run the business in long term, the concept has to re-think else the
competitor will take advantage of it. Today the customer satisfaction
is one of the most important aspects of firm’s performance.

3. Lenders: Lenders normally are the banks and financial institutions.

They provide the term loan as well as the working capital. While
giving the credit facilities to any concerns, apart from the financial
strength, project viability, income generation of the organization,
lenders also like to ensure about the other aspects like market
reputation, compliance culture.

4. Vendors: Vendors play a key role in the success of an organisation.

The organisation which builds a mutually strong relationship with its
vendors improves its overall performance in the marketplace.

5. Government: Government is the largest stakeholder. Government

policy and the legal environment set the tone for the desired
corporate governance practices by the corporate sector.

6. Society: What society wants from good governance in the aggregate

is maximum production of economic well-being. This requires
innovation and experimentation as well as it also requires control,
probity, and risk management to seize the activities involving
hazard to the local community.

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 SOME EXAMINATION QUESTIONS
1. Why the concept form shareholder to stakeholder changed and what are the benefits of it?
2. “Stakeholder engagement provides opportunities to further align business practices with
societal needs and expectations, helping to drive long-term sustainability and shareholder
value”. In the context of this, discuss key principles of stakeholder engagement.
3. List out the seven principles of stakeholder management as suggested by Carlson with brief
descriptions.
4. What were the recommendations of the Caux Round Table (CRT)?
5. Write short notes on (i) Stakeholder Engagement (ii) Stakeholder Analysis.

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 CHAPTER 10

GOVERNANCE AND COMPLIANCE RISK

“Governance is the culture, values, mission, structure, layers of policies, processes and measures by
which organizations are directed and controlled”.
COMPLIANCE RISK Compliance risk is exposure to legal penalties, financial forfeiture and
material loss an organization faces when it fails to act in accordance with
industry laws and regulations, internal policies or prescribed best practices.
Compliance risk is also sometimes known as integrity risk.
This risk is closely interconnected with the operational risk, legal and
reputation, so that from one follows the other.

CONSEQUENCES/ Penalties and Fines: Penalties include financial fines, limitations on

RISKS OF NON- activities, additional barriers to approval and even imprisonment. Below are
COMPLIANCE a few examples of penalties imposed under the laws and regulations in
India.
 As per section 88 of the Companies Act 2013, if a company
fails to maintain a register of members, the company and
every officer of the company in default shall be punishable
with a fine ranging from 50,000 rupees to 300,000 rupees.
Further, as per section 92 of the Act, if a company fails to
file a copy of annual return within the prescribed timeline,
the company shall be punishable with a fine ranging from
50,000 rupees to 500,000 rupees.
 Section 13 of the Foreign Exchange Management Act 1999
imposes a penalty on every person who contravenes any
provision of this Act, or contravenes any rule, regulation,
notification, direction or order issued in exercise of the
powers under this Act, or contravenes any condition subject

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 to which an authorisation is issued by the Reserve Bank. The
said penalty can equal up to three times the sum involved
in such contravention where the amount is quantifiable, or
up to 200,000 rupees where the amount is not
quantifiable. Where such contravention continues, further
penalties can be levied of up to 5,000 rupees for each day
after the first day during which the contravention continues.
 Section 21 of the Maternity Benefit Act 1961 states that
every employer who does not comply with the provisions of
the Act shall be punishable with imprisonment of up to
three months, with a fine of up to 500 rupees or with both.
 Section 22A of the Minimum Wages Act 1948 imposes a
penalty on every employer who contravenes any provision
of this Act or any rule or order made thereunder with a fine
of up to 500 rupees.
 Additional fee is leviable for Non-filing of Annual RoC
forms as per specified MCA slabs, which may extend upto
12 times of original fees. Apart from this, provisions for
striking off the company and prosecution are also present.

1. Criminal Charges: Criminal charges are a potential consequence for

certain regulatory non-compliance. Failure to comply in areas
pertaining to staff management, workplace safety, marketing,
supply chain, corporate governance, stock management and due
diligence laws could result in jail time for director or board member
or other officials.

2. Reputational Damage: A business’ public image is a key to its

success. When a company is thrust into the public eye for failing to
comply with regulations, there are reputational repercussions,
which eventually lead to distrust. Once that happens, loyal
customers may leave, new customers may be put off and
potentially beneficial partnerships may never develop.

3. Access to Markets and Product Delays: Every country has its own
labor and employment laws, and multinational companies are
obligated to comply with local laws and regulations also. Also
businesses are required to meet a host of regulations if they wish to
do business with government.

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 4. Roadblock in Funding: The pre-requisite of any funding exercise is
the status of tax and regulatory compliances. A company cannot
get funded, even in the seed investment level, whose compliances
are not upto date. Banks also require compliance documents like
audited financials, auditor’s report, auditor’s certificate for the last
3 years or as the case may be. Chances of a non-compliant company
availing bank loans are next to zero per cent.

ILLUSTRATIVE TABLE SHOWING POSSIBLE RISKS OF NON – COMPLIANCE (Area wise):

Compliance area (illustrative) Possible risk of Non-compliance

Direct tax compliance  Imposition of penalty Prosecution of directors

 Loss of reputation

Indirect tax compliance  Cancellation of licences Withdrawal of tax benefits

Stoppage of operations
 Loss of reputation

Labour law compliance  Imposition of penalty

 Prosecution of directors / occupier Loss of reputation
 Employee dissatisfaction

Environment, health & safety  Stoppage of operations

laws  Loss of reputation
 Imposition of penalty

Corporate law compliance  Imposition of penalty

 Vacation / prosecution of directors or management
 Loss of reputation

COMPLIANCE RISK Compliance risk management is the process of managing corporate

MANAGEMENT compliance to meet regulations within a workable timeframe and
budget. Compliance Risk management is part of the collective
governance, risk management and compliance discipline. The three
fields frequently overlap in the areas of incident management,
internal auditing, operational risk assessment, and compliance with
various regulations.

laws and regulations in different countries at the national, state and

local levels have made compliance more complicated. Therefore, a
culture must be instilled in an enterprise to ensure minimum
statutory compliance and compliance to other commitments such
as social, industry, client consumer etc. This calls for a systematic

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 approach towards compliance management.

STEPS IN COMPLIANCE RISK 1. Understand compliance obligations : The primary element

MANAGEMENT to manage compliance is to understand compliance
obligation in the light of strategic goals and objectives.
Compliance obligations stem from: Laws and regulations,
industry or generic standards, internal policies, processes
and procedures and contracts executed with clients and
other stakeholders.
for example certain industry standards or best practices –
are termed as compliance commitments.

2. Assess risks : Once compliance obligations are established,

a compliance risk assessment exercise should be
undertaken to identify risks, causes, the areas they impact
and the consequences thereof. A risk analysis to have
better understanding of the risks should follow. Compliance
risks analysed as low should also be monitored and
subjected to corrective action.

3. Address all compliance risks: An enterprise should ensure

an effective action plan to address all compliance risks with
clear ownership, responsibility, accountability and closure
timelines. This can be driven with ease, if the enterprise
ensures a documented compliance policy, objectives,
processes and procedures. Further, compliance
responsibilities must be clearly identified, assigned and
established as part of the job descriptions at different
levels.

4. Evaluate performance : A mechanism to measure and

monitor the performance of the compliance practices and
its impact on strategic goals and objectives must be
developed. Developing compliance performance indicators
is one of the tools. It can be as simple as the number of
employees trained on compliance practices to mature
indicators such as risks of non-compliance and trends.
Feedbacks from clients, stakeholders, suppliers, vendors,
employees and government agencies are a good source of
data to ascertain compliance performance.

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COMPLIANCE RISK There are a number of critical questions organizations should ask
MITIGATION related to compliance risks and the program(s) in place to mitigate
those risks:

 What kinds of compliance failures would create significant

brand risk or reputational damage?
 Could the failures arise internally, in the supply chain, or
with regard to third parties operating on the
organization’s behalf?
 What is the likely impact of that damage on the
organization’s market value, sales, profit, customer
loyalty, or ability to operate?
 What kinds of compliance missteps could cause the
organization to lose the ability to sell or deliver
products/services for a period of time?
 How should the compliance program design, technology,
processes, and resource requirements change in light of
growth plans, acquisitions, or product/category/ service
expansions?
 How well-positioned is the compliance function? Does it
have a seat “at the table” in assessing and influencing
strategic decisions?
 What are the personal and professional exposures of
executive management and the board of directors with
respect to compliance?

The success of any compliance management and monitoring programme depends on the existence,
functioning and integration of these lines of defence in the performance of their duties.

1. Management  Assists in setting and executing strategies.

Assurance  Provides direction, guidance and oversight
 Promotes a strong risk culture & sustainable risk return
thinking
 Promotes a strong compliance culture and management of
risk exposure.
 Ongoing monitoring and management of risks

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 2. Risk Management,
Legal & Compliance
3. Internal Audit & other
Independent
Assurance Providers
From their review, Internal
Auditors should be able to
validate or provide the
following inputs to the CRMP:
ESSENTIALS OF A SUCCESSFUL
COMPLIANCE-RISK
MANAGEMENT PROGRAM
GOVERNANCE AND RISK
COMPLIANCE (GRC)
 Formal, robust and effective risk management within
which the organisation’s policies and minimum standards
are set.
 Overarching risk oversight across all risk types.
 Compile and maintain a legislative universe for the
organisation.
 Facilitate the risk prioritisation of all pieces of legislation
in the regulatory universe.
 Initiate new legislative requirements within the
organisation.
 Facilitate the completion of the Compliance Risk
Management Plan (“CRMP”)
 Update compliance monitoring plans on the CRMP.
 Escalate compliance matters to management.
 Undertake quarterly compliance reporting.
 Independent and objective assurance of overall adequacy
and effectiveness of governance, risk management and
internal controls within the organization.
 Ability to link business risks with established processes and
provide assurance on the effectiveness of mitigation plans
to effectively manage organisational risks.
 Impacted Areas – processes, systems and policies
 Existing Controls
 Additional Controls – arising from amendments to, or new
legislation
 Risk Exposure – High, Medium, Low
 Responsible Party – Affected Parties
 Monitoring Plan – Business Unit Compliance
 Active board and senior management oversight
 Effective policies and procedures
 Compliance risk analysis and comprehensive controls
 Effective compliance monitoring and reporting
 Testing
Until fairly recently, compliance was seen as a separate business
practice, along with governance and risk management. However,
over the past decade, these three disciplines have developed a
considerable number of overlapping activities, such as internal
audits, incident management, operational risk assessment, or
compliance with regulatory programs. Today, many companies take
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an integrated approach to these three areas, referring to them
collectively as Governance, Risk Management and Compliance
(GRC).

Effective GRC implementation helps the organization to reduce risk

and improve control effectiveness, security and compliance through
an integrated and unified approach that reduces the ill effects of
organizational silos and redundancies.

GRC professionals are increasingly being given a seat at the

company strategy table, the revenue generating side. Decision-
makers need them to interpret risk profiles and data, and provide
intelligence on how to increase revenue and sales.
 SOME EXAMINATION QUESTIONS

1. Define Compliance risk. State briefly the need of compliance risk management in the
emerging scenario.
2. Explain the consequences/ risks of non-compliance.
3. What are the steps in effective compliance risk management?
4. How does GRC work ? What are its components?
5. What is the scope and value of GRC for organizational development?
6. Write a short note on essentials of a successful compliance-risk management program.
 CHAPTER 11
Corporate Governance Forums

INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI)

VISION: “To be a global leader in promoting Good Corporate Governance”.

MISSION: “To develop the high calibre professionals facilitating good Corporate
Governance”.
ICSI INITIATIVE: 1. Corporate Governance Research and Training - ICSI has set up the ICSI-
Centre for Corporate Governance Research and Training (CCGRT) with the
objective of fostering and nurturing research initiatives among members of
the Company Secretaries profession and other researchers.
2. ICSI National Award for Excellence in Corporate Governance -. Each year,
the award is conferred upon two best governed companies and ICSI Life
Time Achievement Award for Translating Excellence in Corporate
Governance into Reality is bestowed on an eminent personality.
3. Focus on Corporate Governance in the Course Curriculum - One full
paper on Corporate Governance titled “Governance, Risk Management,
Compliances and Ethics” forms part of the syllabus in the Professional
Programme.
4. PMQ Course in Corporate Governance - ICSI has launched a Post
Membership Qualification Course in Corporate Governance.
5. Secretarial Standards – As a pioneering initiative, ICSI issues Secretarial
Standards to integrate, harmonise and standardise the diverse secretarial
practices prevalent in the corporate sector. Two Secretarial Standards
issued by ICSI i.e.
 SS-1: Secretarial Standard on Meetings of the Board of Directors
and
 SS-2: Secretarial Standard on General Meetings
have been notified in the Official Gazette under Section 118 (10) of the
Companies Act 2013 which provides that every company shall observe
Secretarial Standards with respect to General and Board Meetings.
6. Corporate Governance Publications – The Institute regularly brings out
publications of interest to members and corporate sector to inculcate the
culture of good governance .
7. Investor Education and Awareness – Committed to the cause of investor
education, ICSI is actively engaged in activities relating to investor
awareness and education. So far, the Institute has organised more than
4500 such programmes. Booklets to educate investors have also been
issued by the Institute in English, Hindi as well as other regional languages.
 8. Repository of Independent Directors – The Institute jointly with other
professional statutory bodies under the active encouragement of the
Ministry of Corporate Affairs, maintains a Repository of Independent
Directors to facilitate the individuals who are eligible and willing to act as
Independent Directors. who are eligible and willing to act as Independent
Directors.
9. Customied Training Programme – As an initiative towards propagating and
creating awareness on good corporate governance, the Institute has been
organising customised training programmes for Regulatory bodies, Banks
and Public sector companies on Corporate Laws and Governance.
10. Founder member of National Foundation for Corporate Governance –
The ICSI is one of the four founder trustees of National Foundation for
Corporate Governance, alongwith MCA, CII and ICAI.
11. Founder member of Corporate Secretaries International Association
(CSIA) – ICSI is a founder member of Corporate Secretaries International
Association, alongwith the Chartered Secretaries Institutes of Australia,
Hong Kong, Malaysia, Singapore, South Africa, UK and Zimbabwe.
NATIONAL With the goal of promoting better corporate governance practices in India, the
FOUNDATION Ministry of Corporate Affairs, Government of India, has set up National Foundation
FOR for Corporate Governance (NFCG) in the YEAR 2013 along with Confederation of
CORPORATE Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute
GOVERNANCE of Chartered Accountants of India (ICAI). In the year 2010, stakeholders in NFCG
(NFCG) have been expanded with the inclusion of Institute of Cost Accountants of India
and the National Stock Exchange of India Ltd.

The internal governance structure of NFCG consists:

 Governing Council
 Board of Trustees
 Executive Directorate.

Governing Council of NFCG works at the apex level for policy making. It is chaired
Governing by Minister in- charge, Ministry of Corporate Affairs, Government of India. The
Council members of the Governing Council are :
 Secretary, Ministry of Corporate Affairs, Government of India - Vice
Chairman of the Governing Council;
 President, Institute of Chartered Accountants of India (ICAI);
 President, Institute of Company Secretaries of India (ICSI);
 President , The Institute of Cost Accountants of India (ICAI-CMA);
 Secretary, Institute of Chartered Accountants of India (ICAI);
 Secretary, Institute of Company Secretaries of India (ICSI);
 Secretary, The Institute of Cost Accountants of India (ICAI-CMA);
 Chairman, Securities and Exchange Board of India;

The members of the Board of Trustees are: -

Board of  Director General, Confederation of Indian Industry (CII);
Trustees  Secretary, Institute of Chartered Accountants of India (ICAI);
 Secretary, Institute of Company Secretaries of India (ICSI); and
 Secretary, The Institute of Cost Accountants of India (ICAI-CMA)
 Representative, National Stock Exchange (NSE)

The Executive Directorate provides the internal support to NFCG activities and
Executive implements the decisions of the Board of Trustees. The Executive Director is the
Directorate Chief Executive Officer of NFCG. The Executive Directorate exercises such powers as
may be delegated to it by the Board of Trustees to carry out such functions as may
be entrusted to it by the Board. The Executive Director also functions as the
Secretary of the Council and the Board is supported by full time dedicated
professional secretariat.

VISION: “Be the Key Facilitator and Reference Point for highest standards of Corporate
Governance in India.”

 To foster a culture for promoting good governance, voluntary compliance

MISSION: and facilitate effective participation of different stakeholders;
 To catalyse capacity building in new emerging areas of Corporate
Governance.
 To further research, scholarship, and education in corporate governance in
India;
 To create a framework of best practices, structure, processes and ethics;
ORGANIZATION The Organisation for Economic Co-operation and Development (OECD) was
FOR established in 1961 when 18 European countries plus the United States and
ECONOMIC CO- Canada joined forces to create an organisation dedicated to economic
OPERATION development. It is one of the first non-government organizations to spell out the
AND principles that should govern corporate.
DEVELOPMENT
(OECD)

The mission of the Organisation for Economic Co-operation and Development

MISSION: (OECD) is to promote policies that will improve the economic and social well-
being of people around the world.

The OECD had The OECD had focused on helping governments around the world to:
focused on:  Restore confidence in markets and the institutions that make them
function.
 Re-establish healthy public finances as a basis for future sustainable
economic growth.
 Foster and support new sources of growth through innovation,
environmentally friendly ‘green growth’ strategies and the development of
emerging economies.
 Ensure that people of all ages can develop the skills to work productively
and satisfyingly in the jobs of tomorrow.
 The OECD provides a forum in which governments can work together to share
experiences and seek solutions to common problems. OECD works with
governments to understand what drives economic, social and environmental
change. OECD measures productivity and global flows of trade and investment
analyse and compare data to predict future trends, set international standards on a
wide range of things, from agriculture and tax to the safety of chemicals etc.

INSTITUTE OF DIRECTORS (IOD), UK

The IOD is a non party-political business organisation established in United Kingdom in 1903. The IOD
is charged with promoting good corporate governance for UK business. The board is composed of the
chair, a majority of non-executive directors, and the director general and executive directors. It acts
as a unitary board and has the following powers and responsibilities :

 To manage the affairs and long-term success of the institute

 To approve the strategy of the institute, business and financial planning, to hold the
executive to account and ensure financial and risk stewardship .
 To approve the annual report and accounts

Objects of IOD
 To promote for the public benefit high levels of skill, knowledge, professional competence
and integrity on the part of directors, and equivalent office holders however described, of
companies and other organisations;
 To promote the study, research and development of the law and practice of corporate
governance, and to publish, disseminate or otherwise make available the useful results of
such study or research
 To represent the interests of members and of the business community to government and
in all public forums, and to encourage and foster a climate favourable to entrepreneurial
activity and wealth creation.
 To advance the interests of members of the Institute, and to provide facilities, services and
benefits for them.

COMMONWEALTH ASSOCIATION OF CORPORATE GOVERNANCE (CACG)

The Commonwealth Association of Corporate Governance (CACG) was established in 1998. The CACG
aimed to facilitate the development of institutional capacity that promotes good corporate
governance by education, consultation and information in all Commonwealth countries. There are 53
countries of the Commonwealth, of which 46 are currently Commonwealth Foundation members.
Membership of the Foundation is voluntary, and is open to all Commonwealth governments.
The CACG had two primary objectives:

 To promote good standards in corporate governance and business practice throughout the
Commonwealth.
 To facilitate the development of appropriate institutions which will be able to advance,
teach and disseminate such standards.
The CACG guidelines set out 15 Principles of corporate governance. The Principles apply
 equally to boards of directors of all business enterprises – public, private, family owned or
state-owned. The Principles are applicable to both executive and non-executive directors.

INTERNATIONAL CORPORATE GOVERNANCE NETWORK (ICGN)

The International Corporate Governance Network (“ICGN”) is a not-for-profit company limited by
guarantee and not having share capital under the laws of England and Wales founded in 1995. The
Institute of Company Secretaries of India is a member of ICGN and also the country correspondent
from India. The ICGN is governed by the ICGN Memorandum and Articles of Association. These
principles were first initiated in 1995. The fourth edition of Principles was released in 2014.
It has four primary purposes:
 to provide an investor-led network for the exchange of views and information about
corporate governance issues internationally;
 to examine corporate governance principles and practices; and
 to develop and encourage adherence to corporate governance standards and guidelines;
 to generally promote good corporate governance.

EUROPEAN CORPORATE GOVERNANCE INSTITUTE (ECGI)

The European Corporate Governance Institute (ECGI) was founded in 2002. It has been established to
improve corporate governance through fostering independent scientific research and related
activities.
Vision Statement of ECGI:
 Corporate governance lies at the heart of our capitalist systems. It is the interface between
capital markets and companies, between employees and executives, and between society
and the corporate sector. It is the driver of what companies do, how they do it and the
effects they have on others. In other words, it sits at the centre of the success and failure of
our economic systems.
Mission Statement of ECGI:
 The mission of ECGI is to assist the top academics in the field of corporate governance in
bringing their research to the attention of leading practitioners, policymakers and thought
leaders by making state of the art knowledge accessible and relevant to them. It promotes
the development of new ideas through research that extends the boundaries of our
understanding of how corporate governance contributes to the flourishing of business,
economies and societies.

CONFERENCE BOARD
 The Conference Board was established in 1916 in the United States of America.
 The Conference Board creates and disseminates knowledge about management and the
marketplace to help businesses strengthen their performance and better serve society.
 The Conference Board is dedicated to equipping the world’s leading corporations with the
practical knowledge they need to improve their performance and better serve society.
 It works as a global, independent membership organization in the public interest, it
conducts research, convenes conferences, makes forecasts, assesses trends, publishes
information and analysis, and brings executives together to learn from one another.
 ASIAN CORPORATE GOVERNANCE ASSOCIATION (ACGA)
The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership
organization. ACGA was founded in 1999 from a belief that corporate governance is fundamental to
the long-term development of Asian economies and capital markets.
ACGA’s scope of work covers three areas:
 Research
 Advocacy
 Education
ACGA is funded by a network of sponsors and corporate members, including leading pension
and investment funds, other financial institutions, listed companies, multinational
corporations, professional firms and educational institutions. It is incorporated under the
laws of Hong Kong and is managed by a secretariat based there. Its governing Council
comprises directors from around Asia.

CORPORATE SECRETARIES INTERNATIONAL ASSOCIATION (CSIA)

The CSIA an international federation of professional bodies that promotes the best practices in
corporate secretarial, corporate governance and compliance services.
Strategic Goals:  Reputation
 Growth
 Advocacy

Objectives:  To assist in the creation of such

Steps to Better Corporate Governance:
organisations in countries or regions in
which they do not currently exist.
 To promote the growth, development,
study and practice of secretaryship
 To promote and recommend uniformity in
governance standards.
 To promote and actively support good
governance
 Confirm the leadership role of the board
chairman .
 Check that non-executive directors have the
necessary skills, experience, and courage .
 Consider the calibre of the non-executive
directors .
 Review the role and contribution of non-
executive directors .
 Ensure that all directors have a sound
understanding of the company

The ICSI National Awards for Excellence in Corporate Governance

In pursuit of excellence and to identify, foster and reward the culture of evolving globally acceptable
standards of corporate governance among Indian companies, the “ICSI National Award for Excellence in
Corporate Governance” was instituted by ICSI in the year 2001.

The institution of the Award aims at promoting the cause of Corporate Governance by:

 Recognizing leadership efforts of corporate boards in practising good corporate governance

principles in their functioning;
 Recognizing implementation of innovative practices, programmes and projects that promote
the cause of corporate governance;
 Enthusing the corporates in focusing on corporate governance practices in corporate
functioning; and
 Implementation of acknowledged corporate governance norms in letter and spirit.

The Institute annually bestows upon a corporate leader the “ICSI Lifetime Achievement Award for
Translating Excellence in Corporate Governance into Reality” keeping in view the attributes like: ─
Outstanding contribution to social upliftment and institution building;
 Exemplary contribution in enhancement of stakeholders’ value;
 A visionary with innovative ideas;
 Long tradition of trusteeship, transparency and accountability;
 Qualities of leadership, team spirit, integrity and accountability;
 Proven track record of adherence of statutory obligations; and
 Social acceptance and approval
 SOME EXAMINATION QUESTIONS

1. Briefly discuss the initiatives of the Institute of Company Secretaries of India in the area of
Corporate Governance.
2. With the goal of promoting better corporate governance practices in India, the Government
of India has set up National Foundation for Corporate Governance (NFCG). Explain in brief the
mission of NFCG.
3. What is Asian Corporate Governance Association (ACGA) ? Discuss the scope of work of
ACGA.
4. Discuss about the Organisation for Economic Co-operation and Development.
5. Write notes on:
 Commonwealth Association for Corporate Governance
 Institute of Directors
 International Corporate Governance Network
 European Corporate Governance Institute
 Conference Board
 Corporate Secretaries International Association

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 CHAPTER 12

RISK MANAGEMENT

Risk The possibilities of actual outcome being different from the expected outcome.

“Risk is Exposure to the possibility of loss, injury, or other adverse or unwelcome

circumstance; a chance or situation involving such a possibility”

CLASSIFICATION OF RISKS
Risk may be classified according to controllability, i.e Controllable risk and Uncontrollable risk. In other
words, the Controllable risk is categorized as Unsystemic Risk and Uncontrollable risk is categorized as
Systemic Risk. The concept of controllable and uncontrollable risk may be further explained as under:
Systemic Risk Unsystemic Risk
 It is not fully uncontrollable by an  It is usually controllable by an
organisation. organisation.

 It is not entirely predictable.  It is reasonably predictable.

 It is usually of a macro nature.  It is normally micro in nature.

 It usually affects a large number of  If not managed it directly affects the

organisations operating under a similar
stream.
 It cannot be fully assessed and
anticipated
in advance in terms of timing and gravity.
 The example of such type of risks is
Interest Rate Risk, Market Risk,
Purchasing Power Risk.
individual organisation first.
 It can be usually assessed well in
advance with reasonable efforts and risk
mitigation can be planned with proper
understanding and risk assessment
techniques.
 The examples of such risk are
Compliance
risk, Credit Risk, Operational Risk.

Types of Risks on the basis of impact on finance

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The risks may also be broadly segregated as Financial Risk and Non-financial Risk. Often both financial
and non financial risks are present in any situations which need to be managed and understood.
Financial Risk Non-Financial Risk
The risk which has some direct financial impact on This type of risks do not usually have direct and
the entity is treated as financial risk. This risk may immediate financial impact on the business, but
be the consequences are very serious and later do
have significant financial impact if these risks are
 Market risk,
not controlled at the initial stage. This type of risk
 Credit risk, may include,

 Liquidity risk,  Business/Industry & Service Risk,

 Operational Risk,  Strategic Risk,

 Legal Risk and  Compliance Risk,

 Country Risk.  Industry Fraud Risk,

 Reputation Risk,

 Transaction risk,

 Disaster Risk.

Types of Financial Risks

I. Market Risk This type of risk is associated with market ups and down. It refers to the risk
of loss arising from the change/volatility in the market prices or economic
values which are the deciding factors for the pricing of the product/financial
assets.

The market risks may be Absolute Risk (when it can be measured in

rupee/currency term) and Relative Risk (relative to bench mark index).
Hence the market risk may be defined as the risk to a firm due to the adverse
changes in interest rates, currency rates, equity prices and commodity
prices.

a. Interest Rate Risk: The financial assets which are connected with
interest factors such as bonds/ debentures, faces the interest rate
risk. For example Interest rate risk adversely affects value of fixed
income securities. Any increase in the interest reduces the price of
bonds and debts instruments in debt market and vice - versa. So it
can be said that the changes in the interest rates have an inverse
relationship with the price of bonds.
b. Currency Risk: The volatility in the currency rates is called the
currency risk. These risks affect the firms which have international

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 operations of business and the quantum of the risk depends on the
nature and extent of transactions with the external market.
c. Equity Risk: It means the depreciation in one’s investment due to
the change in market index. For example in the context of
securities, Beta of a stock tells us the market risk of that stock and it
is associated with the day-to-day fluctuations in the market.
d. Commodity Risk: This type of risk is associated with the absolute
changes in the price of the commodity. Since commodities are
physical assets, hence the prices change on account of the demand
and supply factor.
II. Credit Risk When a counter party is unable or unwilling to fulfil their contractual
obligation, the credit risk arises. This type of risk is related to the probability
of default and recovery date. Its effect is measured by cost of replacing cash
flow if the other party defaults. For example, in case of loan given by a bank
to the borrower and the borrower defaults in making payments of the
installments or due interest on the due date, is termed as credit risk.
III. Liquidity Risk The liquidity risk arises due to mis-matches in the cash flow i.e. absence of
adequate funds. Liquidity is altogether different from the word solvency. A
firm may be in sound position as per the balance sheet, but if the current
assets are not in the form of cash or near cash assets, the firm may not make
payment to the creditors which adversely affect the reputation of the firm.
The liquidity risk may be of two types, trading risk and funding risk.
 Trading Risk: It may mean the absence of the liquidity or enough
products or securities etc to actually undertake buy and sell
activities. e.g. in the context of securities trading inability to enter
into derivative transactions with counter parties or make sales or
purchase of securities.
 Funding Risk: It refers to the inability to meet the obligations e.g.
inability to manage funds by either borrowing or the sale of
assets/securities. It arises where the balance sheet of a firm contains
illiquid financial assets which cannot be turned in to cash within a
very short time.
IV. Operational / It arises due to inadequate systems, system capacities, system failure, and
System/ obsolescence risk, management failure on account co-ordination, faulty
Management Risk control or human error. Some best practice against the operational risk
includes clear separation of responsibilities with strong internal control and
regular contingency planning.
V. Obsolescence Risk In the rapid changing world Obsolescence risk is fast emerging and unless the
companies are able to cope up with this timely, the impact will be quite
heavy and may lead to closure of the units also. Nokia is the latest example
on this.
VI. Legal Risk This risk arises when a counter party does not have the legal or regulatory
authority to engage in the transactions. It also includes the compliance and
regulatory risk like insider trading, market manipulations, defaults and
mismanagement of legal affairs etc.

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 VII. Political/ Country Political risk may be on account of declaration of elections in the territory,
Risk area specific risk and political uncertainity.
The Country risk arises where the firm have its business operations abroad.
This risk may arise due to out-break of war between countries, imposition of
the ban on the business transaction of particular commodity/product.
judiciary, legislative and general environment for business.

Types of Non Financial Risks

1. Business/ Industry Business risks implies uncertainty in profits or danger of loss and the events
& Services Risk that could pose a risk due to some unforeseen events in future, which causes
business to fail. Business risk refers to the possibility of inadequate profits or
even losses due to uncertainties e.g., changes in tastes, preferences of
consumers, strikes, increased competition, change in government policy,
obsolescence etc.
2. Strategic Risk Business plans which have not been developed properly and
comprehensively since inception may lead to strategic risk. For example,
strategic risk might arise from making poor business decisions.
3. Compliance Risk This risk arises on account of non-compliance or breaches of laws/
regulations which the entity is supposed to adhere. It may result in
deterioration of reputation in public eye, penalty and penal provisions.
4. Fraud Risk Fraud is perpetrated through the abuse of systems, controls, procedures and
working practices. It may be perpetrated by an outsider or insider. Fraud
may not be usually detected immediately and thus the detection should be
planned for on a proactive basis rather than on a reactive basis.
5. Reputation Risk This type of risk arises from the negative public opinion. Such type of risk
may arise from e.g. from the failure to assess and control compliance risk
and can result in harm to existing or potential business relationships.
6. Transaction Risk Transaction risk arises due to the failure or inadequacy of internal system,
information channels, employees integrity or operating processes.
7. Disaster Risk On account of natural calamities like floods, fire, earthquake, man-made
risks due to extensive exploitation of land for mines activity, land
escalation, risk of failure of disaster management plans formulated by the
company etc.
8. Regulatory Risk On account of change in Government policies and perceptions. Especially
this type of risks is associated with Food and beverages and
Pharmaceuticals industries.
9. Technology Risk Failure of system caused due to tampering of data access to critical
information, non availability of data and lack of controls.

RISK MANAGEMENT
“Risk Management” is a term used to describe the processes which aim to assist organisations identify,
understand, evaluate and take action on their risks with a view to increasing the probability of their
success and reducing the impact and likelihood of failure. Effective risk management gives comfort to
shareholders, customers, employees, other stakeholders and society at large that a business is being
effectively managed and also helps the company or organisation confirm its compliance with corporate
governance requirements.

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Risk management is relevant to all organisations large or small. Effective risk management practices
support accountability, performance measurement and reward and can enable efficiency at all levels
through the organisation. Risk management requires a detailed knowledge and understanding of the
organization (both internal and external) and the processes involved in the business.
Better risk management techniques provide early warning signals so that the same may addressed in
time. In traditional concept the natural calamities like fire, earthquake, flood, etc were only treated as
risk and keeping the safe guard equipments etc were assumed to have mitigated the risk.
Risk management requires commitment from the top management. Thus, Risk Management Process
provides a framework to:

 Ensure that all the foreseeable risks involved are actually understood and accepted before
important decisions are taken.
 Monitor new projects and ongoing operations to ensure that they continue to develop
satisfactorily and no problems or new risks emerge.

Risk Management is part of the corporate strategy. It is a key management tool to safeguard the
business assets for its use for the productive purposes. Risk Management is a logical and systematic
process of establishing the context, identifying, analysing, evaluating, treating, monitoring and
communicating risks associated with any activity, function or process, in a way that enables an
organisation to minimise losses and maximise opportunities.

ADVANTAGES OF RISK MANAGEMENT

Some of the key advantages of having risk management are as under:
 It can help plan and prepare for the opportunities that unravel during the course of a project or
business.
 Risk Management improves strategic and business planning. It reduces costs by limiting legal
action or preventing breakages.
 It establishes improved reliability among the stake holders leading to an enhanced reputation.
 Sound Risk Management practices reassure key stakeholders throughout the organization.
 Risk Management strongly favours for a focused INTERNAL AUDIT PROGRAMME.
 Risk Management in the long run always results in significant cost savings and prevents
wastage of time and effort in firefighting. It develops robust contingency planning.

STEPS IN RISK MANAGEMENT PROCESS

Risk Identification

Risk Analysis

Risk Assessment

Handling/Mitigation
of Risk

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 1. RISK IDENTIFICATION
Risk identification is the first stage of the risk management strategy. For example a risk may be due to
transport of hazardous raw material to the factory. So the source of the risk origin is utmost important
and from this point the journey start to manage the risks.

By risk identification the organization is able to study the activities and places where its resources are
placed to risk. Correct risk identification ensures effective risk management.
The results of risk identification are normally documented in a risk register, which includes:

 A list of identified risks along with their sources,

 Potential risk responses and
 Risk categories.

New risks can be identified throughout the project life cycle as the result of internal or external
changes to a project.

Objective/Purpose:
The objective of the risk identification process is to ensure that all potential project risks are identified.
The ultimate purpose of risk identification is to minimize the negative impact of project hiccups and
threats, and to maximize the positive impact of project opportunities. Awareness of potential project
risks reduces the number of surprises during the project delivery and, thus, improves the chances of
project success, allowing the team to meet the time, schedule and quality objectives of the project.
Finally, the purpose of risk identification is to provide information for the next step of the risk
management process.

Process of Risk Identification :

An effective risk identification process should include the following steps:
 Creating a systematic process - The risk identification process should begin with project
objectives and success factors.

 Gathering information from various sources - Reliable and high quality information is essential
for effective risk management.

 Applying risk identification tools and techniques - The choice of the best suitable techniques
will depend on the types of risks and activities, as well as organizational maturity.

 Documenting the risks - Identified risks should be documented in a risk register and a risk
breakdown structure, along with its causes and consequences.

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  Documenting the risk identification process - To improve and ease the risk identification
process for future projects, the approach, participants, and scope of the process should be
recorded.

 Assessing the process’ effectiveness - To improve it for future use, the effectiveness of the
chosen process should be critically assessed after the project is completed.

Seven Identification Essentials

Identification is a process of brainstorming. It isn’t an exact science and should involve continuous
implementation as new phases, experiences, and viewpoints are introduced. Being vital to the
management process, there are some essentials to risk identification that guarantee maximum
results.
I. Team Participation: Face-to-face interactions between project managers and the team
promise better and more comprehensive communication. The team must feel comfortable
to share and find hidden or elusive risks.
II. Repetition: Information changes appear as the risk management process proceeds. Keeping
identified risks current and updated means the system is focused on mitigating the most
prevalent issues.
III. Approach: Certain objectives require distinct approaches to best combat identification
failure. One method is to identify all root causes, undesirable events and map their potential
impacts. Another is to identify essential performance functions the project must enact, then
find possible issues with each function or goal. Both methods work well, but the latter may
be easier due to its defined scope.
IV. Documentation: Consistent and exhaustive documentation leads to comprehensive and
reliable solutions for a specific project or future risk management team’s analysis. Most
communication is recorded by a project manager and data is copied, stored, and updated
for continued risk prevention.
V. Roots and Symptoms: It is essential in the risk identification phase to find the root causes
of a risk instead of mistaking them with the symptoms. A symptom can be confused with the
root cause, making it critical to discover the origin of risks and denote what are their
symptoms. Other essentials of risk identification involve the analysis phase. This is where
identified risks are further researched and understood.
VI. Project Definition Rating Index (PDRI): PDRI is a risk assessment tool that helps develop
mitigation programs for high-risk areas. It facilitates the team’s risk assessment within the
defined project scope, budget and deadlines. It also provides further detail of individual risks
and their magnitude, represented by a score. The summation of scores is statistically
compared to the project performance as a certainty level for the entire project .
VII. Event Trees: Commonly used in reliability studies and probabilistic risk assessments, event
trees represent an event followed by all factors and faults related to it. The top of the tree is
the event and it is supported by any condition that may lead to that event, helping with
likelihood visibility.

2. RISK ANALYSIS

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  After identification of the risk parameters, the second stage is of analyzing the risk which helps
to identify and manage potential problems that could undermine key business initiatives or
projects.
 To carry out a Risk Analysis, first identify the possible threats and then estimate the likelihood
that these threats will materialize. The analysis should be objective and should be industry
specific.
 Risk Analysis can be complex, as it requires to draw on detailed information such as project
plans, financial data, security protocols, marketing forecasts and other relevant information.
However, it’s an essential planning tool, and one that could save time, money, and
reputations.

Risk analysis is useful in many situations like:

 While planning projects, to help in anticipating and neutralizing possible problems.
 While deciding whether or not to move forward with a project.
 While improving safety and managing potential risks in the workplace.
 While preparing for events such as equipment or technology failure, theft, staff sickness, or
natural disasters.
 While planning for changes in environment, such as new competitors coming into the market,
or changes to government policy.
 When all the permutations-combinations of possible events/ threats are listed while analyzing
the risk parameters and the steps taken to manage such risks, the risk matrix is designed /
popped-up before the decision making and implementing authority.

Process of Risk Analysis:

I. Identify Threats: The first step in Risk Analysis is to identify the existing and possible threats that
one might face. These can come from many different sources. For instance, they could be:
 Human – Illness, death, injury, or other loss of a key individual.
 Operational – Disruption to supplies and operations, loss of access to essential assets,
or failures in distribution.
 Reputational – Loss of customer or employee confidence, or damage to market
reputation.
 Procedural – Failures of accountability, internal systems, or controls, or from fraud.
 Project – Going over budget, taking too long on key tasks, or experiencing issues with
product or service quality.
 Financial – Business failure, stock market fluctuations, interest rate changes, or non-
availability of funding.
 Technical – Advances in technology, or from technical failure. l Natural – Weather,
natural disasters, or disease.
 Political – Changes in tax, public opinion, government policy, or foreign influence.
 Structural – Dangerous chemicals, poor lighting, falling boxes, or any situation where
staff, products, or technology can be harmed.
A number of different approaches can be used to carry out a thorough analysis:
 Run through a list such as the one above to see if any of these threats are relevant.
 Think about the systems, processes, or structures used and analyze risks to any part of
these.

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  Ask others who might have different perspectives. Ask for input from team members
and consult others in the organization, or those who run similar projects.
 Tools such as SWOT Analysis and Failure Mode and Effects Analysis can also help to
uncover threats, while Scenario Analysis helps to explore possible future threats.

II. Estimate Risk: Once the threats are identified, it is required to calculate both the likelihood of
these threats being realized, and their possible impact. One way of doing this is to make best
estimate of the probability of the event occurring, and then to multiply this by the amount it will
cost to set things on the right track. This gives a value for the risk:

Risk Value = Probability of Event × Cost of Even

As a simple example, imagine that a risk has been identified that your rent may increase
substantially. You think that there’s 80 percent chance of this happening within the next year,
because your landlord has recently increased rents for other businesses. If this happens, it will
cost your business an extra Rs. 500,000 over the next year. So the risk value of the rent increase
is:
0.80 (Probability of Event) x Rs.500, 000 (Cost of Event) = Rs. 400,000 (Risk Value)

III. RISK ASSESSMENT

Risk assessment is the way in which enterprises get a handle on how significant each risk is to
the achievement of their overall goals. The process must proceed in a structured and disciplined
fashion. It must be correctly sized to the enterprise’s size, complexity, and geographic reach.
When assessing risks, it’s important to determine whether the risk is - inherent risk, residual
risk, or both. Inherent risk as the risk to an entity in the absence of any actions management
might take to alter either the risk’s likelihood or impact. Residual risk is the risk remaining after
management’s response to the risk. Some entities interpret:
 Inherent risk to be level of risk assuming responses currently in place fail, and
 Residual risk to be the level of risk assuming existing responses operate according to
design.

Process of Risk Analysis

1. Develop assessment criteria: The first activity within the risk assessment process is to develop a
common set of assessment criteria to be deployed across business units, corporate functions,
and large capital projects. Risks and opportunities are typically assessed in terms of impact and
likelihood.
2. Assess risks: Assessing risks consists of assigning values to each risk and opportunity using the
defined criteria. An initial screening of the risks and opportunities is performed using qualitative
techniques followed by a more quantitative treatment of the most important risks and
opportunities lending themselves to quantification (not all risks are meaningfully quantifiable).
Qualitative assessment consists of assessing each risk and opportunity according to descriptive
scales as described in the previous section. Quantitative analysis requires numerical values for
both impact and likelihood using data from a variety of sources.

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 The quality of the analysis depends on the accuracy and completeness of the numerical values
and the validity of the models used. Both qualitative and quantitative techniques have
advantages and disadvantages

For qualitative assessments, the most commonly used assessment techniques are interviews,
crossfunctional workshops, surveys, benchmarking, and scenario analysis. Quantitative
techniques range from benchmarking and scenario analysis to generating forward looking point
estimates (deterministic models) and then to generating forward looking distributions
(probabilistic models).
3. Assess risk interactions: Risks do not exist in isolation. Enterprises have come to recognize the
importance of managing risk interactions. Even seemingly insignificant risks on their own have
the potential, as they interact with other events and conditions, to cause great damage or
create significant opportunity. Therefore, enterprises are gravitating toward an integrated or
holistic view of risks using techniques such as risk interaction matrices, bow-tie diagrams, and
aggregated probability distributions.
4. Prioritize risks: Once the risks have been assessed and their interactions documented, it’s time
to view the risks as a comprehensive portfolio to enable the next step – prioritizing for risk
response and reporting to different stakeholders. Ranking and prioritizing is often done in a two-
step process:
 First, the risks are ranked according to one, two, or more criteria such as impact rating
multiplied by likelihood rating or impact multiplied by vulnerability.
 Second, the ranked risk order is reviewed in light of additional considerations such as
impact alone, speed of onset, or the size of the gap between current and desired risk
level (risk tolerance threshold). If the initial ranking is done by multiplying financial
loss by likelihood, then the final prioritization should take qualitative factors into
consideration.

5. Response to Risks: The results of the risk assessment process then serve as the primary input to
risk responses whereby response options are examined (accept, reduce, share, or avoid), cost-
benefit analyses performed, a response strategy formulated, and risk response plans developed.
6. Effective and sustainable risk assessment process: To be effective and sustainable, the risk
assessment process needs to be simple, practical, and easy to understand. People aren’t
enough. To be efficient, they must be supported by the right technology.

IV. HANDLING OF RISK

The ownership of risk should be allocated. Responsibilities and accountabilities of the persons
handling risks need to be identified and assigned. The persons concerned when the risk arises,
should document it and report it to the higher ups in order to have the early measures to get it
minimized. Risk may be handled in the following ways.

1. Risk Avoidance: Risk Avoidance means to avoid taking or choosing of less risky business/project.
For example one may avoid investing in stock market due to price volatility in stock prices and
may prefer to invest in debt instruments.

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2. Risk Retention/absorption: It is the handling the unavoidable risk internally and the firm bears/
absorbs it due to the fact that either because insurance cannot be purchased of such type of risk
or it may be of too expensive to cover the risk and much more cost-effective to handle the risk
internally. There are two types of retention methods for containing losses as under: –

 Active Risk Retention: Where the risk is retained as part of deliberate management
strategy after conscious evaluation of possible losses and causes. –
 Passive Risk Retention: Where risk retention occurred through negligence. Such type
of retaining risk is unknown or because the risk taker either does not know the risk or
considers it a lesser risk than it actually is.

3. Risk Reduction: In many ways physical risk reduction (or loss prevention, as it is often called) is
the best way of dealing with any risk situation and usually it is possible to take steps to reduce
the probability of loss. The ideal time to think of risk reduction measures is at the planning stage
of any new project when considerable improvement can be achieved at little or no extra cost.
The cautionary note regarding risk reduction is that, as far as possible expenditure should be
related to potential future savings in losses and other risk costs; in other words, risk prevention
generally should be evaluated in the same way as other investment projects.

4. Risk Transfer: This refers to legal assignment of cost of certain potential losses to another. The
insurance of ‘risks’ is to occupy an important place, as it deals with those risks that could be
transferred to an organization that specialises in accepting them, at a price. Usually, there are 3
major means of loss transfer viz.,
 By Tort,
 By contract other than insurance,
 By contract of insurance.

The main method of risk transfer is insurance. The value of the insurance lies in the financial
security that a firm can obtain by transferring to an insurer, in return for a premium for the risk
of losses arising from the occurrence of a specified peril. Thus, insurance substitutes certainty
for uncertainty. Insurance does not protect a firm against all perils but it offers restoration,
atleast in part of any resultant economic loss.

RISK MITIGATION STRATEGY

Risk mitigation is defined as taking steps to reduce adverse effects. Risk mitigation is the process
by which an organization introduces specific measures to minimize or eliminate unacceptable
risks associated with its operations.
Once risks have been identified and assessed, the strategies to manage the risk fall into one or
more of the following categories:

I. Transfer Risk: Normally in projects assignments or multifaceted exercises, execution is

fought with risks. Different agencies work together and these agencies take care to
transfer risk in their areas to another agency which is better equipped to take care of a

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 risk for a consideration. The risk may be in the form of loss of reputation or sub quality
performance and this risk is taken care of through transfer.

II. Tolerate Risk or Risk Retention: It is retention of the risk. It is accepting the loss when it
occurs. True self insurance falls in this category. Risk retention is a viable strategy for
small risks where the cost of insuring against the risk would be greater over time than
the total losses sustained. All risks that are not avoided, reduced or transferred are
retained by default. War is an example since most property and risks are not insured
against war, so the loss attributed by war is retained by the insured. Also any amount
of potential loss (risk) over the amount insured is retained risk. This may also be
acceptable if the chance of a very large loss is small or if the cost to insure for greater
coverage amounts is so great it would hinder the goals of the organization too much.

III. Reduce Risk: By far the greater number of risks will belong to this category. The
purpose of treatment is not necessarily to obviate the risk, but more likely to contain
the risk to an acceptable level. Internal controls are actions instigated from within the
organization (although their effects may be felt outside of the organization) which are
designed to contain risk to acceptable levels. Outsourcing could be an example of risk
reduction if the outsourcer can demonstrate higher capability at managing or reducing
risks. In this case companies outsource only some of their departmental needs. For
example, a company may outsource only its software development, the
manufacturing of hard goods, or customer support needs to another company, while
handling the business management itself. This way, the company can concentrate
more on business development without having to worry as much about the
manufacturing process.

IV. Avoid Risk: This method results in complete elimination of exposure to loss due to a
specific risk. It can be established by either avoiding to undertake the risky project or
discontinuance of an activity to avoid risk. This means that no risky projects are
undertaken. Alternatively, a project may be abandoned midway to mitigate the risk
while handling a project. It is not performing an activity which could carry risk. An
example would be not buying a property or business in order to not take on the liability
that comes with it. Another would be not flying in order to not take the risk that the
aeroplaneswere to be hijacked. Avoidance may seem the answer to all risks, but
avoiding risks also means losing out on the potential gain that accepting (retaining) the
risk may have allowed. Not entering a business to avoid the risk of loss also avoids the
possibility of earning profits.

V. Combine Risk: When the business faces two or three risks the overall risk is reduced by
combination. This strategy is suitable mainly in the areas of financial risk. Different
financial instruments say, shares and debentures are taken in a single portfolio to
reduce the risk.

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 VI. Sharing Risk: Insurance is a method of sharing risk for a consideration. For example by
paying insurance premium the company shares the risk with companies and the
insurance companies themselves share their risk by doing re-insurance.

VII. Hedging Risk: Exposure of funds to fluctuations in foreign exchange rates, prices etc.,
bring about financial risks resulting in losses or gain. The downside risk is often taken
care.

MAINTAINING THE RISK STRATEGY

It has already been noted that the risk environment of any organization is constantly changing
and developing, and that the priorities of objectives and the consequent importance of risks will
shift and change. The risk management process is therefore a dynamic and ongoing one, not an
issue for a one off exercise. The process has to allow for periodic review of risks and for
consequent adjustment of the control response.

A key tool is the use of ongoing Control and Risk Self Assessment (CRSA) procedures. This
procedure embeds review of risk and control into the organization at every level and uses the
knowledge and experience of the staff that are closest to each function to assess the movement
in risks and the appropriateness of control.

FRAUD RISK MANAGEMENT

 “any behavior by which one person intends to gain a dishonest advantage over
another”. In other words, fraud is an act or omission which is intended to cause
wrongful gain to one person and wrongful loss to the other, either by way of
concealment of facts or otherwise.
 Section 25 of the Indian Penal Code, 1860 defines the word, “Fraudulently”, which
means, a person is said to do a thing fraudulently if he does that thing with intent to
defraud but not otherwise.
 Section 17 of the Indian Contract Act, 1872, ‘fraud’ means and includes any of the
following acts committed by a party to a contract, or with his connivance (intentional
active or passive acquiescence), or by his agent with intent to deceive or to induce a
person to enter into a contract.
 The suggestion that a fact is true when it is not true and the persons
making the suggestion does not believe it to be true;
 The active concealment of a fact by a person having knowledge or belief
of the fact;
 A promise made without any intention of performing it;
 Any other act fitted to deceive;
 Any such act or omission as the law specially declares to be fraudulent.
 Section 447 of The Companies Act, 2013 defines “fraud”, which reads as under:

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 “fraud” in relation to affairs of a company or anybody corporate, includes any act,
omission, concealment of any fact or abuse of position committed by any person or any
other person with the connivance in any manner, with intent to deceive, to gain undue
advantage from, or to injure the interests of, the company or its shareholders or its
creditors or any other person, whether or not there is any wrongful gain or wrongful
loss.

The Fraud Risk Management Policy

The Fraud Risk Management Policy will help to strengthen the existing anti-fraud controls by raising the
awareness across the Company and
 Promote an open and transparent communication culture.
 Promote zero tolerance to fraud/misconduct.
 Encourage employees to report suspicious cases of fraud/misconduct.
 Spread awareness amongst employees and educate them on risks faced by the
company.

Such a policy may include the following:

1. Defining fraud: This shall cover activities which the company would consider as fraudulent.
2. Defining Role & responsibilities: The policy may define the responsibilities of the officers who
shall be involved in effective prevention, detection, monitoring & investigation of fraud. The
company may also consider constituting a committee or operational structure that shall ensure
an effective implementation of anti-fraud strategy of the company. This shall ensure effective
investigation in fraud cases and prompt as well as accurate reporting of fraud cases to
appropriate regulatory and law enforcement authorities.
3. Communication channel: Encourage employees to report suspicious cases of fraud/misconduct.
Any person with knowledge of suspected or confirmed incident of fraud/misconduct must
report the case immediately through effective and efficient communication channel or
mechanism.
4. Disciplinary action: After due investigations disciplinary action against the fraudster may be
considered as per the company’s policy.
5. Reviewing the policy: The employees should educate their team members on the importance of
complying with Company’s policies & procedures and identifying/ reporting of suspicious
activity, where a situation arises. Based on the developments, the policy should be reviewed on
periodical basis.

Reporting of fraud under Companies Act 2013

The Companies Act, 2013 has introduced many new reporting requirements for the statutory auditors of
companies. One of these requirements is given under the Section 143(12) of the Companies Act, 2013
which requires the statutory auditors or cost accountant or company secretary in practice to report to

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the Central Government about the fraud/suspected fraud committed against the company by the
officers or employees of the company.

Consequence of non-compliance: Sub-section 15 of section 143 states that if any auditor, cost
accountant or company secretary in practice do not comply with the provisions of sub-section (12), he
shall be punishable with

Minimum fine RS. 100000 Maximum 2500000.

REPUTATION RISK MANAGEMENT

Reputation Risk as the risk arising from negative perception on the part of customers, counterparties,
shareholders, investors, debt-holders, market analysts, other relevant parties or regulators that can
adversely affect a bank’s ability to maintain existing, or establish new, business relationships and
continued access to sources of funding (eg through the interbank or securitization markets).
Reputational risk is multidimensional and reflects the perception of other market participants.

Loss of Reputation has long lasting damages like:

 It destroys the Brand Value

 Steep downtrend in share value.
 Ruined of Strategic Relationship l Regulatory relationship is damaged which leads to stringent
norms.
 Recruitment to fetch qualified staff as well the retention of the old employees becomes
difficult.

For managing the reputation risk, the following principles are worth noting:

 Integration of risk while formulating business strategy.

 Effective board oversight. l Image building through effective communication.
 Promoting compliance culture to have good governance.
 Persistently following up the Corporate Values.
 Due care, interaction and feedback from the stakeholders.
 Strong internal checks and controls.
 Peer review and evaluating the company’s performance.
 Quality report/ newsletter publications.
 Cultural alignments.

RESPONSIBILITY OF RISK MANAGEMENT

RESPONSIBILITY OF RISK MANAGEMENT:

I. Section 134(3) (n) of the Companies Act, 2013 provides that a statement indicating
development and implementation of a risk management policy for the company including

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 identification therein of elements of risk, if any, which in the opinion of the Board may threaten
the existence of the company.
II. SEBI (LODR) Regulations, 2015 also provides that company shall lay down procedures to inform
Board members about the risk assessment and minimization procedures. The Board shall be
responsible for framing, implementing and monitoring the risk management plan for the
company.
III. The Risk Management Plan must include all elements of risks. The traditional elements of
potential likelihood and potential consequences of an event must be combined with other
factors like the timing of the risks, the correlation of the possibility of an event occurring with
others, and the confidence in risk estimates.
IV. Risk management policies should reflect the company’s risk profile and should clearly describe
all elements of the risk management and internal control system and any internal audit
function. A company’s risk management policies should clearly describe the roles and
accountabilities of the board, audit committee, or other appropriate board committee,
management and any internal audit function.
V. A company should have identified Chief Risk Officer manned by an individual with the vision
and the diplomatic skills to forge a new approach. He may be supported by “risk groups” to
oversee the initial assessment work and to continue the work till it is completed.

VI. Regulation 21 of SEBI (LODR) Regulations, 2015,

 The board of directors shall constitute a Risk Management Committee.
 The majority of members of Risk Management Committee shall consist of members of
the board of directors.
 The Chairperson of the Risk management committee shall be a member of the board of
directors and senior executives of the listed entity may be members of the committee.
 The risk management committee shall meet at least once in a year. [Inserted by the
SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018,
w.e.f. 1-4-2019 ]
 The board of directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to
the committee and such other functions as it may deem fit (such function shall
specifically cover cyber security).
 The provisions of this regulation shall be applicable to top 500 listed entities,
determined on the basis of market capitalisation, as at the end of the immediate
previous financial year.

ROLE OF COMPANY SECRETARY IN RISK MANAGEMENT

The company secretaries are governance professionals whose role is to enforce a compliance
framework to safeguard the integrity of the organization and to promote high standards of
ethical behavior. He has a significant role in assisting the board of the organization to achieve its

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vision and strategy. The activities of the governance professional encompass legal and
regulatory duties and obligations and additional responsibilities assigned by the employer.
However, in essence, the functions of a Governance Professional include:

 Advising on best practice in governance, risk management and compliance.

 Championing the compliance framework to safeguard organizational integrity.
 Promoting and acting as a ‘sounding board’ on standards of ethical and corporate
behavior.
 Balancing the interests of the Board or governing body, management and other
stakeholders.

The listing agreement also provides for the establishment of the Risk Management Committee
as per Regulations. Since it is the part of the Corporate Governance norms and non-compliance
of the same is to be reported by the Company Secretary.

In terms of Section 203(1)(ii), a Company Secretary is a Key Managerial Person. Hence being a
top level officer and board confidante, a Company Secretary can pay a role in ensuring that a
sound Enterprise wide Risk Management [ERM] which is effective throughout the company is in
place.

A Company Secretary can ensure that the following questions [an illustrative list] are
effectively addressed at the board level:
 What is the organization’s risk management philosophy?
 Is that philosophy clearly understood by all personnel?
 What are the relationships among ERM, performance, and value?
 How is ERM integrated within organizational initiatives?
 What is the desired risk culture of the organization and at what point has its risk
appetite been set?
 What strategic objectives have been set for the organization and what strategies have
been or will be implemented to achieve those objectives?
 What related operational objectives have been set to add and preserve value?
 What internal and external factors and events might positively or negatively impact the
organization’s ability to implement its strategies and achieve its objectives?
 What is the organization’s level of risk tolerance?
 Is the chosen risk response appropriate for and in line with the risk tolerance levl?
 Is communication effective — from the top down, across, and from the bottom up the
organization?
 How effective is the process currently in place for exchanging information with
external parties?
 What is the process for assessing the presence and performance quality of all eight ERM
components over time?

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 RISK GOVERNANCE:
Risk governance includes the skills, infrastructure (i.e., organization structure, controls and
information systems), and culture deployed as directors exercise their oversight. Good risk
governance provides clearly defined accountability, authority, and communication/reporting
mechanisms.
Risk oversight is the responsibility of the entire Board and the same can be achieved through a
review mechanism which inter-alia could include:
 Developing policies and procedures around risk that are consistent with the
organization’s strategy and risk appetite.
 Taking steps to foster risk awareness.
 Encourage an organizational culture of risk adjusting awareness .
 Maintenance of a Risk Register .
 A compliance certificate on the identification of risks and establishment of mitigation
measures.

RISK MANAGEMENT FRAMEWORKS AND STANDARDS

I. Enterprise Risk Management – Integrated Framework (2004)
In response to a need for principles-based guidance to help entities design and implement effective
enterprisewide approaches to risk management, Committee of Sponsoring Organizations of the
Treadway Commission (COSO) issued the Enterprise Risk Management – Integrated Framework in 2004.
This framework defines essential enterprise risk management components, discusses key ERM
principles and concepts, suggests a common ERM language, and provides clear direction and guidance
for enterprise risk management. The guidance introduces an enterprise-wide approach to risk
management as well as concepts such as: risk appetite, risk tolerance, portfolio view.

Enterprise risk management encompasses:

 Aligning risk appetite and strategy – Management considers the entity’s risk appetite in
evaluating strategic alternatives, setting related objectives, and developing mechanisms to
manage related risks.
 Enhancing risk response decisions – Enterprise risk management provides the rigor to identify
and select among alternative risk responses – risk avoidance, reduction, sharing, and
acceptance.
 Reducing operational surprises and losses – Entities gain enhanced capability to identify
potential events and establish responses, reducing surprises and associated costs or losses.
 Identifying and managing multiple and cross-enterprise risks – Every enterprise faces a myriad
of risks affecting different parts of the organization, and enterprise risk management facilitates
effective response to the interrelated impacts, and integrated responses to multiple risks.
 Seizing opportunities – By considering a full range of potential events, management is
positioned to identify and proactively realize opportunities.
 Improving deployment of capital – Obtaining robust risk information allows management to
effectively assess overall capital needs and enhance capital allocation.

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Components of Enterprise Risk Management:
Enterprise risk management consists of eight interrelated components. These are derived from the way
management runs an enterprise and are integrated with the management process. These components
are:

 Internal Environment – The internal environment encompasses the tone of an organization, and
sets the basis for how risk is viewed and addressed by an entity’s people, including risk
management philosophy and risk appetite, integrity and ethical values, and the environment in
which they operate.
 Objective Setting – Objectives must exist before management can identify potential events
affecting their achievement. Enterprise risk management ensures that management has in place
a process to set objectives and that the chosen objectives support and align with the entity’s
mission and are consistent with its risk appetite.
 Event Identification – Internal and external events affecting achievement of an entity’s
objectives must be identified, distinguishing between risks and opportunities.

Opportunities are channeled back to management’s strategy or objective-setting processes.

 Risk Assessment – Risks are analyzed, considering likelihood and impact, as a basis for
determining how they should be managed. Risks are assessed on an inherent and a residual
basis.
 Risk Response – Management selects risk responses – avoiding, accepting, reducing, or sharing
risk – developing a set of actions to align risks with the entity’s risk tolerances and risk appetite.
 Control Activities – Policies and procedures are established and implemented to help ensure the
risk responses are effectively carried out.
 Information and Communication – Relevant information is identified, captured, and
communicated in a form and timeframe that enable people to carry out their responsibilities.
Effective communication also occurs in a broader sense, flowing down, across, and up the entity.
 Monitoring – The entirety of enterprise risk management is monitored and modifications made
as necessary. Monitoring is accomplished through ongoing management activities, separate
evaluations, or both.

ISO 31000: International Standard for Risk Management

ISO 31000 is the international standard for risk management. This standard is published on the 13th of
November 2009.

It is the charter for an effective Risk Management, it provides an uniform set-off principles for adopting
Risk Management Process.

Scope
ISO 31000:2009 provides generic guidelines for the design, implementation and maintenance of risk
management processes throughout an organization.

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Accordingly, ISO 31000:2009 is intended for a broad stakeholder group including:
 Executive level stakeholders.
 Appointment holders in the enterprise risk management group.
 Risk analysts and management officers.
 Line managers and project managers.
 Compliance and internal auditors.
 Independent practitioners.

Benefits:
ISO 31000 ISO 31000 contains 11 key principles that position risk management as a fundamental
process in the success of the organization. ISO 31000 is designed to help organizations:
1. Increase the likelihood of achieving objectives
2. Encourage proactive management
3. Be aware of the need to identify and treat risk throughout the organization
4. Improve the identification of opportunities and threats
5. Comply with relevant legal and regulatory requirements and international norms
6. Improve financial reporting  Improve governance
7. Improve stakeholder confidence and trust
8. Establish a reliable basis for decision making and planning
9. Improve controls
10. Effectively allocate and use resources for risk treatment
11. Improve operational effectiveness and efficiency
12. Enhance health and safety performance, as well as environmental protection
13. Improve loss prevention and incident management
14. Minimize losses.
15. Improve organizational learning
16. Improve organizational resilience.
17. Proactively improve operational efficiency and governance.

Managing risk:
ISO 31000:2009 gives a list on how to deal with risk:
 Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk
 Accepting or increasing the risk in order to pursue an opportunity
 Removing the risk source
 Changing the likelihood
 Changing the consequences
 Sharing the risk with another party or parties (including contracts and risk financing)
 Retaining the risk by informed decision

RISK MANAGEMENT AND INTERNAL CONTROLS

The risk profile of a company may be represented through a Risk Register, a suggestive template of
which is illustrated below:

Sl.No Risk Area Key risks Root cause Mitigation

measures

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 1. Business Risk Decreasing market Lack of innovation, Keeping a vigil on
share market survey latest
etc., developments and
continuous
monitoring
2. Financial risk Leveraging capital Inability to assess Adoptiong a
structure and the the appropriate Resource planning
cash flows funding policy
requirements
3. Regulatory and C o Non compliance of Not keeping knowledge
m p l i a n c e Risk applicable laws abreast of the updation &
latest changes in maintenance of a
the Regulatory robust compliance
environment check list

RISK MATRIX

Risk Matrix is a matrix that is used during Risk & Control Self Assessment (RCSA) activity to define the
various levels of risk at each stage, activity, process and sub-process. Risk Matrix comprises of :
 Impact analysis
 Likelihood
 Operating Effectiveness
 Design Effectiveness
Ratings are assigned to all above categories, pre and post control environment. Based on the ratings a
Gross/ Inherent Risk Level and Residual Risk level is determined (HIGH/MEDIUM/LOW), respectively.
The Inherent and Residual Risks follow the RED-AMBER-GREEN color coding mapped to HIGH-MEDIUM-
LOW Risks, respectively.

MODEL RISK MANAGEMENT POLICY

A risk management policy serves two main purposes: to identify, reduce and prevent undesirable
incidents or outcomes and to review past incidents and implement changes to prevent or reduce
future incidents. A risk management policy should include the following sections:
 Risk management and internal control objectives (governance)

 Statement of the attitude of the organisation to risk (risk strategy)

 Description of the risk aware culture or control environment

 Level and nature of risk that is acceptable (risk appetite)

 Risk management organisation and arrangements (risk architecture)

 Details of procedures for risk recognition and ranking (risk assessment)

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 List of documentation for analysing and reporting risk (risk protocols)

 Risk mitigation requirements and control mechanisms (risk response)

 Allocation of risk management roles and responsibilities

 Risk management training topics and priorities

 Criteria for monitoring and benchmarking of risks

 Allocation of appropriate resources to risk management

 Risk activities and risk priorities for the coming year

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 SOME EXAMINATION QUESTIONS

1. What do you mean by Risk Management?

2. Discuss about the Controllable and Un-controllable Risks.
3. Elaborate on different types of Financial and Non-financial Risk.
4. What are the different dimensions of identifying threats in Risk Analysis process ? In a
company there is a probability of increase of 40% cost of raw material from present level of
Rs 10 crores. What shall be risk value of cost of production ?
5. Describe the Risk Management Process and its advantages?
6. What do you understand by Fraud risk? What strategy can adopt to mitigate such a risk?
7. Whether Risk Management and Corporate Governance Principles have any relations ?Explain.
8. Write short notes on:
 ISO 31000:2009 relating to the Risk Management.
 Fraud Risk Management.
 Reputation Risk Management.
 Reporting of fraud by Statutory Auditor.
 Risk Matrix.

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 CHAPTER 13

Compliance Management

COMPLIANCE A compliance management system is the method by which corporate

manage the entire compliance process. It includes:

 The compliance program: consists of the policies and procedures

which guide in adherence of laws and regulations.
 Compliance audit: The compliance audit is independent testing of
level of compliance with various laws and regulations applicable.
 Compliance report etc. and in other words it is called compliance
solution.

Compliance with law and regulation must be managed as an integral part of
any corporate strategy. The board of directors and management must
 recognize the scope and implications of laws and regulations that
apply to the company.
 They must establish a compliance management system as a
supporting system of risk management system as it reduces
compliance risk to a great extent.
 To ensure an effective approach to compliance, the participation of
senior management in the development and maintenance of a
compliance program is necessary.
 They should review the effectiveness of its compliance management
system at periodic intervals, so as to ensure that it remains updated
and relevant in terms of modifications/ changes in regulatory
regime including acts, rules, regulations etc. and business
environment.
Compliance Vs Conformance:
BASICS COMPLAINCE CONFORMANCE

1. MEANING:  Compliance is forced  Conformance is voluntary

adherence to a law, adherence to a standard, rule,
regulation, rule, process specification, requirement,
or practice. design, process or practice.

2. APPLICABLE:  Compliance applies to  Conformance applies to

laws and regulations that strategies and plans that are
one has no option but to adopted to be more productive

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 follow or face penalties. or to improve quality.
Such regulations may
potentially be productive
for society but don’t
necessarily contribute to
an organization’s goals.
SIGNIFICANCE OF 1. Image building of a responsible corporate citizen.
COMPLIANCE 2. Stake holders can trust in the working of the corporate.
3. Prevent improper conduct in the organization.
4. It keeps things running smoothly and minimizes risks.
5. It helps the company in maintaining a good reputation
6. Real time status of legal/statutory compliances.
7. Higher Productivity in the Company.
8. Building Positive Reputation.
9. It enhances credibility/creditworthiness being a law abiding
company.
10. Proper compliance management avoids the penal provisions.

DIFFERENT ASPECTS OF Regulatory Compliance: Regulatory compliance is an organization’s

COMPLIANCES adherence to laws, regulations, guidelines and specifications relevant to its
business. Violations of regulatory compliance regulations often result in legal
punishment, including penalties/ fines. Regulatory compliance varies not
only by industry but often by location. The financial, research, and regulatory
structures in one country, for example, may be similar but with particularly
different in another country. These similarities and differences are often a
product “of reactions to the changing objectives and requirements in
different countries, industries, and policy contexts.

Corporate Compliance: A corporate compliance program is generally defined

as a formal program specifying an organization’s policies, procedures, and
actions within a process to help prevent and detect violations of laws and
regulations. It goes beyond a corporate code-of-conduct since it is an
operational program, not simply a code of expected ethical behavior.
However, a comprehensive program goes further by applying the code to the
specific risks of an organization and integrating measures to address those
risks. A corporate compliance program is a magnet that brings all of a
company’s compliance efforts together. A comprehensive program helps
position a company to divert disasters, meet objectives, and grow
shareholder value.

Legal compliance: Legal compliance is the process or procedure to ensure

that an organization follows relevant laws, regulations and business rules.
There are two requirements for an enterprise to be compliant with the law,
first its policies need to be consistent with the law. Second, its policies need

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 to be complete with respect to the law. It is important to keep in mind that if
a strong legal governance component is in place, risk can be accurately
assessed and the monitoring of legal compliance be carried out efficiently.

Thus legal compliance is a must and if the company has entered into formal
contracts with customers, the clauses of those contracts also become legal
requirements. Without adherence to the letter of the law, the corporates
face costly litigation and the potential of untold damage to the business and
its reputation

CORPORATE Corporate compliance management involves a full process of research and

COMPLIANCE analysis as well as investigation and evaluation. The goals of compliance, a
MANAGEMENT compliance program, sometimes called a corporate compliance program or
regulatory compliance program, include:
 Compliance with legal and regulatory requirements.
 Compliance with internal policies and contracts.
 Management of related compliance risks.
 Establishment of an ethical culture
SIGNIFICANCE OF 1. Image building of a responsible corporate citizen.
CORPORATE 2. Stake holders can trust in the working of the corporate.
COMPLIANCE 3. Prevent improper conduct in the organization.
MANAGEMENT 4. It keeps things running smoothly and minimizes risks.
5. It helps the company in maintaining a good reputation.
6. Real time status of legal/statutory Prevent unintended non
compliances/ prosecutions.
7. Higher Productivity in the Company.
8. Building Positive Reputation

ESSENTIALS OF AN A corporate compliance program is generally defined as a formal program

EFFECTIVE specifying an organization’s policies, procedures, and actions within a
COMPLIANCE process to help prevent and detect violations of laws and regulations. The
PROGRAM essential of a successful compliance program may be list out as under:

1. Development of written Compliance Policies, Procedures and

framing of Standards: The successful implementation of any
compliance program needs a well drafted written document of the
compliance policy. Until and unless one have a written policy, how
the deviation from the set standard will be measured. Further it is
also important that the compliance policies and procedures should
be designed in such a way that it helps employees remain in
compliance while carrying out their job functions.
2. Designation of a compliance officer and compliance committee: A
designated compliance officer, who shall take care of the
regulatory compliance related functions and he shall be responsible
to ensure to have the adherence of the compliance policy and put up

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 a note before the Board of Directors periodically for their perusal
and directions wherever required.
3. Developing open lines of communication: The Compliance Policy
shall have a provision to welcome open communication for
reporting instances of potential fraud and abuse. This concept of
whistle blower may prove to be early warning signals and may be
effective in prevention thereof. The name and designation of the
reporting official shall be kept confidential.
4. Appropriate training and education: For effective implementation
of the compliance policy and for updating employees, officers,there
is need of proper training and education.
5. Internal monitoring and auditing: The compliance policy shall
contain a clause for having the effective auditing and monitoring
plans.
6. Response to detected deficiencies: Wherever the deficiencies in the
prescribed procedure come in the knowledge of the concerned
official, there shall be a reporting system to make a report to the
designated official.
7. Enforcement of disciplinary standards: There shall be a clause in
the compliance policy to take the disciplinary action against the
erring official, who has not adhered to the prescribed set of rules
and regulations.

Effective use of Information technology: By using available tools of

information technology compliances can be managed effectively. Various
compliance management software are available to facilitate compliance
management.
CHALLENGES FOR 1. Large number of legislations and multiple regulators.
EFFECTIVE CORPORATE 2. Multiple business locations attracting state legislations.
COMPLIANCE 3. lack of ownership /awareness of functional staff about compliance
MANAGEMENT requirements.
4. Segmented compliance initiatives.
5. Time-consuming and unreliable manual reporting.
6. Dynamic legal environment, lack of a robust updation process,
frequent changes in process owners and internal processes.

PROCESS OF Installing proper compliance process is a must for the success of compliance
CORPORATE programme. Systematic approach helps in chalking out a plan of action in
COMPLIANCE right direction. Some companies have a streamlined, highly efficient system
MANAGEMENT for managing their compliance requirements. By adopting a unified approach
to regulatory management, companies can minimize costs, maximize
efficiency and reduce their risk exposure. It is desirable that the compliance
management process is so designed that it is able to generate a complete
MIS Report for secretarial and legal data providing the key information
including company details, key dates, brief information about company’s

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 business, certifications obtained, addresses of office locations, details of
Board of Directors, shareholding pattern, key registration nos. such as
company registration no., scrip code, ISIN code etc., contact details of
agencies such as auditors, consultant, banker, government agencies,
printers, R&T agents etc It is essential to segregate roles and responsibilities
within the function to ensure proper distribution of work, rotation of
responsibilities where possible, avoid confusion and set focus for each
person within the function. Critical compliance means the severity of
compliance and its impact on business, while it is true that all laws are of
equal importance and should be complied with in letter and spirit.
CHECKLIST TO BE a. Understand the Scope: Identify all regulatory and internal
FOLLOWED FOR compliance needs and efforts to challenge if organizational
SETTING UP A GOOD responsibilities are properly aligned. This should not be a “one and
COMPLIANCE done” step, but rather performed periodically as regulatory
PROGRAM landscapes and operational environments are typically changing.
b. Gather Internal and External Intelligence: Tap the collective
intelligence of the company by soliciting thoughts from the Board,
management and employees. Also look beyond the walls of the
organization to understand industry developments and competitor
reactions to corporate compliance. This includes researching legal
actions to help identify risks.
c. Define Objectives: Define objectives from an enterprise and business
unit standpoints.
d. Conduct a Risk Assessment: Identify risks, probabilities, and the
significance in terms of both qualitative and quantitative measures.
Consider scenarios from a cause-and-effect .
e. StandpointAlign Controls: Policies, procedures, and actions within a
process, should be in place to address the risks to best achieve
objectives.
f. Verify /Buy-In and Understandability: Everyone needs to know their
roles. For control owners to be expected to act appropriately, they
need to understand the “why” and “how” of the compliance
program. Controls need to be clearly communicated, ideally with a
feedback loop so control owners can voice their insights and
concerns.
g. Test Cultural Support: Many organizations have put in place paper
programs that have no real effect on the operations of the
organization. Determine if the cultures at headquarters and all
relevant business units are supportive of a strong corporate
compliance program. This can be accomplished through surveys,
independent reviews and entity-level control assessments.
h. Assess On-Going Compliance: Build monitoring, internal audit and
special reviews into the compliance program to help ensure that
controls are operating effectively. This effort should also seek to

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 identify the most-efficient alignment of responsibilities and controls.
i. Train, Educate and Communicate: Deliver periodic targeted training
and share compliance information with the business units, global
functions, external partners, customers, vendors, and other
stakeholder groups.
j. Measure Results and Report to Board: Develop a reporting
dashboard to keep management groups and the Board aware of
compliance measures, trends and developments. This should address
both internal and external activities.

INTERNAL COMPLIANCE The Internal Compliance Reporting Mechanism (ICRM) should be sound and
REPORTING fool proof. Deviations in nonreporting should be avoided. In any Compliance
MECHANISM (ICRM) Program it is of paramount important that the employees working in the
organisation shall feel free in reporting non-compliance related issues either
by their own parts or has observed any deficiency on the counter part. The
ICRM may involve the following process:

 Establish a robust reporting mechanism.

 Encourage employees to report the non-compliance in a fear less
environment.
 Functional Heads be made responsible to collect such information in
a time bound manner.
 Early warning signals should be identified of the possible areas of the
non-compliances.


A sound program should include the following elements:

 Communication : make the program known to all levels of

employees.
 Accessibility : make the program available to all employees around
the world in various languages.
 Cultural Appropriateness : adapt the program to the constraints
imposed by local culture, history and practice.
 Universality : make the reporting mechanism available to relevant
third parties, e.g. suppliers, consultants, customers.
 Confidentiality and Anonymity : guarantee confidentiality and
permit discreet or anonymous reports.
 Screening : provide safeguards against frivolous or malicious
reports.
 Collect Data: monitor reports, track them over time, identify
vulnerabilities and take corrective action.
 Remedial Action and Feedback: take action and provide feedback
to the reporter as appropriate.

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  Management Visibility: report to the audit committee or board of
directors.
 Employee Protection: protect reporting employees both during
employment and after departure from the company.
 External Communication: report to shareholders and other
interested parties on actions taken and results achieved.

SCOPE OF CORPORATE COMPLIANCE MANAGEMENT

Corporate & Economic  Companies Act, 1956 and the various Rules and Regulations framed
Laws : there under, MCA-21 requirements and procedures.
 Secretarial Standards/Accounting Standards/Cost Accounting
Standards issued by ICSI/ICAI/ ICAI(Cost) respectively.
 Emblems and Names (Prevention of Improper Use) Act, 1947.
 Foreign Exchange Management Act, 1999 and the various
Notifications, Rules and Regulations framed there under.
 Foreign Contribution Regulation Act, 1976.
 Conservation of Foreign Exchange and Prevention of Smuggling
Activities Act, 1974.
 Competition Law. – Special Economic Zones Act, 2005. – Prevention of
Money Laundering Act, 2002.
Securities Laws:  SEBI Act, 1992 .
 Securities (Contracts) Regulation Act, 1956 and rules made
thereunder.
 Various rules, regulations guidelines and circulars issued by SEBI .
 Provisions of SEBI (Listing Obligations and Disclosure requirements)
Regulations, 2015.
 Sarbanes-Oxley Act, 2002 and other legislations etc, wherever
applicable.
 Depositories Act, 1996.
Commercial Laws:  Indian Contract Act, 1872.
 Negotiable Instruments Act, 1881.
 Sale of Goods Act, 1930.
Fiscal Laws:  Income Tax Act, 1961.
 Central Excise Act, 1944.
 Customs Act, 1962 .
 Service Tax.
Labour Laws:  Minimum Wages Act, 1948.
 Payment of Bonus Act, 1965.
 Payment of Gratuity Act, 1972.
 Factories Act, 1948.

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Pollution/Environment
related Laws:
Industry Specific Laws:
 Industrial Dispute Act, 1947.
 Air (Prevention and Control of Pollution) Act, 1981.
 Water (Prevention and Control of Pollution) Act, 1974.
 Environment Protection Act, 1986.
 Public Liability Insurance Act, 1991.
 Legislations applicable to specific categories of industries – electricity,
power generation and transmission, insurance, banking, chit funds,
etc.

USE OF TECHNOLOGY FOR COMPLIANCE MANAGEMENT

A well-designed compliance management programme has abilities to perform the following key
functions across the enterprise:[CARPET]
Compliance The compliance programme must provide a single enterprise-wide
Dashboard: dashboard for all users to track and trend compliance events. All
compliance events should be easily viewed interactively through the
enterprise compliance dashboard. External auditors, internal auditors,
compliance officers can use the dashboards to make decisions on the
compliance status of the organization.
Policy and Procedure A well-designed document management system forms the basis of
Management: managing the entire lifecycle of policies and procedures within an
enterprise.
Event Management: The compliance management system must have ability to capture and track
events, cases and incidents across the extended enterprise. Compliance
officers, call centre personnel, IT departments, QA personnel, ethics hotline
should be able to log in any adverse event across the enterprise, upon
which the necessary corrective and preventive actions are initiated.
Rules and Regulations: A well-designed compliance management solution must offer capabilities
for organization to continuously stay in sync with changing rules and
regulations. As soon as there are regulatory changes, the various
departments should be notified proactively through “email based”
collaboration. A well-designed Compliance management programme offers
up-to-date regulatory alerts across the enterprise.
Audit Management: Audits have now become part of the enterprise core infrastructure. Internal
audits, financial audits, external audits, vendor audits must be facilitated
through a real-time system. Audits are no more an annual activity and
corporations offer appropriate audit capabilities. Appropriate evidence of
internal audits becomes critical in defending compliance to regulations.
Quality Management: Most organizations have internal operational, plant-level or departmental
quality initiatives to industry mandates like Six-sigma or ISO 9000.
Training Management: Most compliance programs often require evidence of employee training.
Sarbanes-Oxley Act, stress on employee training. Well-designed compliance
program requires a well-integrated approach to training management.
Compliance Task Organizations must plan, manage and report status of all compliance
Management: related activities from a centralized solution. Automated updates from the
various compliance modules should provide for up-to-the-minute status

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 reporting that could be viewed by the Board, corporate compliance officer,
entity compliance coordinators, quality offices and others as designated.

COMPLIANCE SOLUTIONS
Risk/Cultural Through employee surveys, interviews, and document reviews, a company’s
Assessment: culture of ethics and compliance at all levels of the organization is validated.
Our Reports and recommendations with detail observations identify gaps
between company’s current practices and benchmarks with international
practices.
Program In this phase, compliance solution providers help company in creating
Design/Update: guideline documents that outline the reporting structure, communications
methods, and other key components of the code of ethics and compliance
program.
Policies and In this phase compliance solution providers help company to develop or
Procedures: enhance the detailed policies of the program, including issues of financial
reporting, antitrust, conflicts of interest, gifts and entertainment, records
accuracy and retention, employment, the environment, global business,
fraud, political activities, securities, and sexual harassment, among others.
Communication, Compliance solution providers help company to clearly articulate,
Training and communicate, and reinforce not only the specifics of the program, but also
Implementation: the philosophy behind it, and the day-to-day realities of it. In this way, key
stakeholders and other personnel are more likely to embrace the program
and incorporate it into their attitudes and behaviours.
Ongoing self- The true test of a company’s ethics and compliance program comes over
Assessment, time. The cultural assessment, mechanisms, and processes put in place
Monitoring and including employee surveys, internal controls, and monitoring and auditing
Reporting: programs, help organisations achieve sustained success.

ROLE OF COMPANY SECRETARIES

Company Secretaries with core competence in compliance and corporate governance play a crucial
role in the corporate compliance management. Corporate Compliance Management can add
substantial business value only if compliance is done with due diligence. A Company Secretary is the
‘Compliance Manager’ of the company.
It is he who ensures that the company is in total compliance with all regulatory provisions. Also as per
section 204(1) of Companies Act, 2013 read with rule 9 of the Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014, Company Secretary in Practice is the
secretarial auditor. In terms of Form MR-3 the secretarial auditor needs to examine and report on
the compliance of the following five specific laws:

 The Companies Act, 2013 (the Act) and the rules made thereunder.
 The Securities Contracts (Regulation) Act, 1956 (“SCRA”) and the rules made hereunder.
 The Depositories Act, 1996 and the Regulations and Bye laws framed thereunder.
 Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder to

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 the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial
Borrowings.
 The following Regulations and Guidelines prescribed under the Securities and Exchange
Board of India Act, 1992 („SEBI Act‟):-
 The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011;
 The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations,
1992.
 The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009.
 The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee
Stock Purchase Scheme) Guidelines, 1999.
 The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations,
2008.

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 SOME EXAMINATION QUESTIONS

1. Draft a Compliance Management programme for a listed company.

2. Difference between compliance and Conformance.
3. Describe the scope of compliance management.
4. Explain compliance management process in general.
5. Explain the systems approach to compliance management.
6. “A corporate compliance program is a formal program specifying an organization’s policies,
procedures and actions within a process to help prevent and detect violations of laws and
regulations”. In this context discuss the essential of an effective compliance program.

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 CHAPTER 14

Internal Control

INTERNAL The International Standard on Auditing 315 (SA 315) defines internal control.
CONTROL: According to SA 315:
Internal control is a process designed, implemented and maintained by those
charged with the governance, management and other personnel.[TCWG]
It provides reasonable assurance about the
 achievement of an entity’s objectives in the categories of financial
reporting,
 effectiveness and efficiency of operations,
 safeguarding of assets and
 compliance with applicable laws and regulations.[LOAF]

CLASSIFICATION OF INTERNAL CONTROL

Internal control can broadly be classified into two categories viz.:
 Accounting controls/financial controls, and
 Administrative controls.
Accounting controls/financial
controls:
Administrative Controls:
Accounting controls comprise the plan of organisation and
all methods and procedures that are concerned mainly with
and relate to, the safeguarding of assets and the reliability
of the financial information. Internal control relating to
accounting system aims at ensuring that: –
 The transactions are executed in accordance with
the management’s authorization.
 All transactions are promptly recorded in an
appropriate manner to permit the preparation of
financial information and to maintain
accountability for assets.
 The access to assets is permitted only in
accordance with the management authorization.
 The assets are reviewed and verified at reasonable
intervals and appropriate action is taken with
regard to the variances.
It can safely be said that scope of internal control is much
wider than that of accounting controls.
Example: maintaining inventory is an accounting control.
A number of controls falling under operational controls can
also be administrative controls. Administrative controls are

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ELEMENTS OF INTERNAL CONTROL:
Segregation of duties:
Organisational structure:
Authorisation and approval:
Personnel:
Management:
Accounting Controls:
very wide in their scope. They include all other managerial
controls concerned with decision making process. They are
concerned with the authorisation of transactions and
include anything from plan of organisation to procedures,
record keeping, distribution of authority and the process of
decision-making. Administrative controls have an indirect
relationship with financial records and the auditor may
evaluate only those administrative controls which have a
bearing on the financial records.
Examples of operational controls are: quality control,
works standards, periodic reporting, policy appraisal etc.
The division of an operation into a series of sub-operations
undertaken by different people, allows for internal checks to
take place. Such a control merely reduces the chance of
error or irregularity occurring, but it does not eliminate the
risk. It reduces the risk of intentional manipulation and
error and increases the element of checking.
The structure or pattern of an organisation will mean system
of arrangements and relations as between various levels of
personnel for carrying out of plans and policies towards
achievement of objectives for which the business stands.
The delegation of authority and responsibility should be
clearly specified. A common cause of irregularity is
imbalance between responsibility, status and
remuneration.
All transactions should require authorisation or approval by
an appropriate responsible person. While designing
procedures, provision should be made for proper
authorization, to establish full accountability for the actions
taken.
There should be procedures to ensure that personnel have
capabilities commensurate with their responsibilities. The
qualifications, selection and training as well as the innate
personal characteristics of the personnel involved are
important features to be considered in setting up any
control system.
Management is responsible for establishing, monitoring and
reviewing the systems of internal control. In practice,
management may delegate the reviewing function to
internal auditor. It is, thus the duty of internal auditor to
provide management with reassurance concerning the
efficiency and effectiveness of internal controls.
These are the controls within the recording function which
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 check that the transactions to be recorded and processed
have been authorised, and that they are all included and
that they are correctly recorded and accurately processed.
Such controls include checking the arithmetical accuracy of
the records, the maintenance and checking of totals,
reconciliations, control accounts and trial balances, and
accounting for documents.
Supervision: Any system of internal control should include the
supervision by responsible officials of day-to-day
transactions and the recording thereof. The supervisory role
undertaken by staff should be allocated to those with proper
training and suitability to such a function.
COMPONENTS OF INTERNAL CONTROL (MICRA)
Control Environment: The control environment is the comprehensive set of actions taken by
management that set the tone for how employees engage in their day-to-day activities. The control
environment is comprised of all policies and procedures the actions taken by management to deal
with issues, and the values they espouse. Taken as a whole, the control environment shows the level
of support that management has for the system of internal controls.If control environment is weak
then internal control tends to be weak.
The control environment encompasses the following elements:
a. Communication and enforcement of integrity and ethical values .
b. Commitment to competence.
c. Participation by those charged with governance.
d. Management’s philosophy and operating style.
e. Organizational structure.
f. Assignment of authority and responsibility.
g. Human resource policies and practices.
Entity’s Risk Assessment Process: For financial reporting purposes, the entity’s risk assessment
process includes how management identifies business risks relevant to the preparation of financial
statements in accordance with the entity’s applicable financial reporting framework, estimates their
significance, assesses the likelihood of their occurrence, and decides upon actions to respond to and
manage them and the results thereof. Risks can arise or change due to circumstances such as the
following:
 Changes in operating environment.
 New personnel.
 Rapid growth.
 New technology.
 New business models, products, or activities.
 Corporate restructurings.

Information System, Including the Related Business Processes, Relevant to Financial Reporting, and
Communication:
The information system relevant to financial reporting objectives, which includes the financial
reporting system, encompasses methods and records that:
 Identify and record all valid transactions.
 Describe on a timely basis the transactions in sufficient detail to permit proper classification

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 of transactions for financial reporting.
 Measure the value of transactions in a manner that permits recording their proper monetary
value in the financial statements.
 Determine the time period in which transactions occurred to permit recording of
transactions in the proper accounting period.
 Present properly the transactions and related disclosures in the financial statements.
Communication, which involves providing an understanding of individual roles and responsibilities
pertaining to internal control over financial reporting, may take such forms as policy manuals,
accounting and financial reporting manuals, and memoranda. Communication also can be made
electronically, orally, and through the actions of management.
Control Activities: Generally, control activities that may be relevant to an audit may be categorized as
policies and procedures that pertain to the following:
 Performance reviews: These control activities include reviews and analyses of actual
performance versus budgets, forecasts, and prior period performance; relating different sets
of data – operating or financial – to one another, together with analyses of the relationships
and investigative and corrective actions; comparing internal data with external sources of
information; and review of functional or activity performance.
 Information processing: The two broad groupings of information systems control activities
are application controls, which apply to the processing of individual applications, and general
IT controls, which are policies and procedures that relate to many applications and support
the effective functioning of application controls by helping to ensure the continued proper
operation of information systems.
 Monitoring of Controls: An important management responsibility is to establish and maintain
internal control on an on-going basis. Monitoring of controls may include activities such as
management’s review of whether bank reconciliations are being prepared on a timely basis,
internal auditors’ evaluation of sales personnel’s compliance with the entity’s policies on
terms of sales contracts, and a legal department’s oversight of compliance with the entity’s
ethical or business practice policies. Monitoring is done also to ensure that controls continue
to operate effectively over time.
 Physical controls: Controls that encompass:
 The physical security of assets, including adequate safeguards such as secured
facilities over access to assets and records.
 The authorization for access to computer programs and data files.
 The periodic counting and comparison with amounts shown on control records (for
example, comparing the results of cash, security and inventory counts with
accounting records).

LIMITATIONS OF INTERNAL CONTROL

1. Internal control may reduce the auditors vigilance and observations with an unfavourable
effect on the quality of audit.
2. Internal control is expensive to install and maintain.
3. The management may over rely on the strength of internal control system and relax their
supervision which may leave room for errors and frauds thus exposing the auditor to
potential civil liabilities.

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 4. If not well instituted it may encourage over staffing.
5. Rigid implementation may lead to a slowdown in the operation.
6. Additionally, controls can be circumvented by the collusion of two or more people or
inappropriate management override of internal control.
7. Further, in designing and implementing controls, management may make judgments on the
nature and extent of the controls it chooses to implement, and the nature and extent of the
risks it chooses to assume.

TECHNIQUES OF INTERNAL CONTROL SYSTEM

Any business that hires employees runs the risk of fraudulent activity. Fraud can have a large negative
impact on one’s business’s bottom line. The following points in this regard are worth mentioned:
 There should be clear division of the work.
 Segregation of the work should be in such a manner that the work done by one person is the
beginning of the work for another person.
 There should be the clarity of the responsibility.
 The work flow process be documented or standardized so that the staff may perform the
work as suggested in the work flow chart.
 No single persons should be allowed to have access or control over any important business
operation.
 There should be job rotation of the staff duties periodically.
 Staff should be asked to go on mandatory leave periodically so that other person may come
to know if someone is playing foul with the system.

Internal The Institute of Chartered Accountants of England and Wales defines internal check
Check as the allocation of authority and work in such a manner as to effort the checks on
the day to day transactions which operate continuously as part of routine system
whereby the work of one person is automatically proved independently or is
complementary to the work of another, the object being prevention or early
detection of error and frauds.
The following are the important objects of internal check system: (i) To assign to a
specific person, the responsibility of particular acts, defaults or omissions by
allocation of specific duties. (ii) To obtain physical and financial confirmation of
facts and entries physical and financial by creation and preservation of necessary
records. (iii) To facilitate the breakdown of accounting procedures where required
so as to avoid bottlenecks and establish an even flow of work and operations. (iv)
To reduce the possibilities of fraud and errors.
Essential Features of Internal Check:
 There should be proper division of work and responsibilities.
 The duties of each person should be properly defined so as to fix definite
responsibilities of each individual.
 Possibilities of giving absolute control to anybody should not be left out
unchecked.
 Too much confidence on a person should be avoided.
 Physical inventory of fixed assets and stocks should be taken periodically.
 Assets should be protected from unauthorised use.

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Internal Audit “Internal audit is an independent appraisal activity established within an
organisation to examine and evaluate the activities as a service to the organisation.
The objective of internal audit is to assist members of the organisation in the
effective discharge of their responsibilities. To this end, the internal auditor furnishes
them with analyses, appraisal, recommendations, counsel and information
concerning the activities reviewed.”
The following are the main aspects of internal auditing: 1. Review, appraisal and
evaluation of the soundness, adequacy and application of financial, accounting and
other operating controls. 2. Ascertaining the adequacy and reliability of
management information and control systems. 3. Ascertaining the achievement of
management objectives and compliance with established plans, policies and
procedures. 4. Ensuring proper safeguards for assets - their utilization and
accounting thereof. 5. Detection and prevention of fraud and error. 6. Ascertaining
the integrity of management data in an organisation.

Risk based Internal Audit (RBIA) is an internal methodology which is primarily

focused on the inherent risk involved in the activities or system and provide
assurance that risk is being managed by the management within the defined risk
appetite level It is the risk management framework of the management and seeks at
every stage to reinforce the responsibility of management and BOD (Board of
Directors) for managing risk.

STEPS FOR INTERNAL CONTROL

 Identify the key areas where the internal control mechanism is to be established.
 Every work flow should be so documented that it is not complete if another person has not
checked it out.
 The other person’s role should start when the first person’s role comes to an end.
 Establish the surprise check mechanism where the money matters are involved.
 Reporting of the non-adherence of key compliance areas.
 Review mechanism of the control units.
 Establishment of Vigil Mechanism.

COSO’S INTERNAL CONTROL FRAMEWORK

The Committee of Sponsoring Organizations of the Treadway Commission (COSO). It is a joint
initiative of the five private sector organizations (American Accounting Association, American Institute
of CPA, Financial Executives International, The Association of Accountants and Financial Professionals in
Business and The Institute of Internal Auditors) and is dedicated to providing thought leadership
through the development of frameworks and guidance on enterprise risk management, internal control
and fraud deterrence.

In 1992 the COSO released its Internal Control–Integrated Framework (the original framework). On
May 14, 2013, COSO released its revisions and updates to the 1992 document Internal Control .

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As per definition given by COSO, the Internal control is a process, effected by an entity’s board of
directors, management, and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives relating to operations, reporting, and compliance.
The fundamental concepts from the definition of Internal Control are:
 Geared to the achievement of objectives in one or more separate but overlapping Categories.
 A process consisting of ongoing tasks and activities – it is a means to an end, not an end in
itself.
 Effected by people – it is not merely about policy and procedure manuals, systems, and forms,
but about people and the actions they take at every level of an organization to effect internal
control.
 Able to provide reasonable assurance, not absolute assurance, to an entity’s senior
management and board of directors.
 Adaptable to the entity structure – flexible in application for the entire entity or for a particular
subsidiary, division, operating unit, or business process.

Objectives:
The Framework sets forth three categories of objectives, which allow organizations to focus on separate
aspects of internal control:
 Operations Objectives: These pertain to effectiveness and efficiency of the entity’s operations,
including operational and financial performance goals, and safeguarding assets against loss.
 Reporting Objectives : These pertain to internal and external financial and non-financial
reporting and may encompass reliability, timeliness, transparency, or other terms as set forth
by regulators, standard setters, or the entity’s policies.
 Compliance Objectives: These pertain to adherence to laws and regulations to which the entity
is subject.

Components of Internal Control: When we talk about the Internal Control, two key phrase comes to our
mind i.e.

1. Internal check and

2. Internal audit.

1. Internal Check : Internal check means an arrangement that a transaction is process by two or
more persons and each one is independent and starts with when the predecessor has
completed the task. So, it is a self balancing system, which have the in-built systems of
independent checking of the work done by other.

2. Internal Audit : The second important aspect is the internal audit. Internal audit may be done
by the own staff or by engaging any professional person outside of the organisation. The scope
of the internal audit is determined by the management. Internal Auditor is required to submit
its report to the management (who is appointing authority). The report should inter alia cover
the points relating to the, adequacy of the internal check and control systems, adherence to the
established management controls, maintenance of the records and reports on the financial
accounting etc. The internal audit should be carried out of all the Departments of the
organisations and before start of the audit, the auditor should well understand the plans,

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 policies and procedures of the Dept/Firm in order to find the job specifications, its descriptions
and accountability.

Relationship of Objectives and Control:

A direct relationship exists between objectives, which are what an entity strives to achieve, components,
which represent what is required to achieve the objectives, and entity structure (the operating units,
legal entities, and other structures).

COSOs Internal Control - Integrated Framework

The relationship can be depicted in the form of a cube.

 The three categories of objectives are represented by the columns.
 The five components are represented by the rows.
 The entity structure, which represents the overall entity, divisions, subsidiaries, operating units,
or functions, including business processes such as sales, purchasing, production, and marketing
and to which internal control relates, are depicted by the third dimension of the cube.

Efficacy of Internal Controls and its Review

The efficacy of the internal control mechanism depends when the employees accepts this philosophy in
the true letter and spirit.
Q. What Internal Control Can Do:
 Internal control can help an entity achieve its performance and profitability targets, and prevent
loss of resources.
 It can help ensure reliable financial reporting.
 It can help ensure that the enterprise complies with laws and regulations, avoiding damage to
its reputation and other consequences.
 In sum, it can help an entity get to where it wants to go, and avoid pitfalls and surprises along
the way.

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Limitation of Internal control

Limitation of Internal control:

 Internal control cannot change an inherently poor manager into a good one.
 Internal control cannot ensure success, or even survival in case of shifts in government policy
or programs, competitors’ actions or economic conditions, since these are beyond the
management’s control.
 An internal control system, no matter how well conceived and operated, can provide only
reasonable-- not absolute--assurance to management and the board regarding achievement
of an entity’s objectives.
 The likelihood of achievement is affected by limitations inherent in all internal control
systems.
 Controls can be circumvented by the collusion of two or more people, and management has
the ability to override the system.
 Another limiting factor is that the design of an internal control system must reflect the fact
that there are resource constraints, and the benefits of controls must be considered relative
to their costs.
 Thus, while internal control can help an entity achieve its objectives, it is not a panacea.
ROLE AND RESPONSIBILITIES WITH REGARD TO INTERNAL CONTROL
Everyone in an organization has responsibility for internal control.

Management: The chief executive officer is ultimately responsible and should assume “ownership”
of the system. More than any other individual, the chief executive sets the “tone at the top” that
affects integrity and ethics and other factors of a positive control environment.

SEBI (LODR) Regulations, 2015

The CEO or the Managing Director or manager or in their absence, a Whole Time Director
appointed in terms of Companies Act, 2013 and the CFO shall certify to the Board that :
A. They have reviewed financial statements and the cash flow statement for the year and that
to the best of their knowledge and belief :
 these statements do not contain any materially untrue statement or omit any
material fact or contain statements that might be misleading;
 these statements together present a true and fair view of the company’s affairs and
are in compliance with existing accounting standards, applicable laws and
regulations.
B. There are, to the best of their knowledge and belief, no transactions entered into by the
company during the year which are fraudulent, illegal or violative of the company’s code of
conduct.
C. They accept responsibility for establishing and maintaining internal controls for financial
reporting and that they have evaluated the effectiveness of internal control systems of the
company pertaining to financial reporting and they have disclosed to the auditors and the
Audit Committee, deficiencies in the design or operation of such internal controls, if any, of
which they are aware and the steps they have taken or propose to take to rectify these
deficiencies.
D. They have indicated to the auditors and the Audit committee:

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  significant changes in internal control over financial reporting during the year;
 significant changes in accounting policies during the year and that the same have
been disclosed in the notes to the financial statements; and
 instances of significant fraud of which they have become aware and the
involvement therein, if any, of the management or an employee having a
significant role in the company’s internal control system over financial reporting.
Board of Directors: Management is accountable to the board of directors, which provides governance,
guidance and oversight. Effective board members are objective, capable and inquisitive. They also have
a knowledge of the entity’s activities and environment, and commit the time necessary to fulfill their
board responsibilities. A strong, active board, particularly when coupled with effective upward
communications channels and capable financial, legal and internal audit functions, is often best able to
identify and correct such a problem.

Companies Act 2013 Section 134(5)(e) The Directors’ Responsibility Statement referred shall state
that:
the directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that such internal financial controls are adequate and were
operating effectively.

Internal Auditors: Internal auditors play an important role in evaluating the effectiveness of control
systems, and contribute to ongoing effectiveness. Because of organizational position and authority in an
entity, an internal audit function often plays a significant monitoring role.

Other Personnel: Internal control is, to some degree, the responsibility of everyone in an organization
and therefore should be an explicit or implicit part of everyone’s job description. Virtually all employees
produce information used in the internal control system or take other actions needed.

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 SOME EXAMINATION QUESTIONSS

1. Discuss in brief the components and principles of Internal Control.

2. Discuss briefly the efficacy of Internal Control.
3. Discuss in detail about the COSO’s Internal Control Framework.
4. Write a note on the roles and responsibilities of Internal Control System.
5. Internal check and internal control are two frequently used terms in risk management and
compliance. Explain the meaning of Internal Check and Internal Control and also mention how
these two are different from each other.

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 CHAPTER 15
Reporting

FINANCIAL REPORTING
MEANING: Financial reporting is the process of producing statements that disclose an
organisation’s financial status to management, investors and the
government.
PURPOSES:  It helps management to engage in effective decision making
concerning the company’s objectives and overall strategies.
 Financial reporting provides vital information about the financial
health and activities of the company to its stakeholders including
its shareholders, potential investors, consumers, and government
regulators.
COMPONENTS:  The financial statements – Balance Sheet, Statement of Profit &
Loss, Cash flow statement & Statement of changes in stock holder’s
equity.
 The notes to financial statements .
 Quarterly & Annual reports (in case of listed companies) .
 Prospectus (In case of companies going for IPOs).
 Management Discussion & Analysis (In case of public companies)
OBJECTIVES: 1) Helps management of an organisation in planning, analysis,
benchmarking and decision making.
2) Helps investors, promoters, debt provider, creditors in making
rational and prudent decisions regarding investment, credit etc.
3) Providing information to shareholders & public at large in case of
listed companies about various aspects of an organisation.
4) Providing information as to how an organisation is procuring &
using various resources.
5) Providing information to the statutory auditors which in turn
facilitates audit..
IMPORTANCE:  In helps and organisation to comply with various statues and
regulatory requirements applicable to company.
 Financial Reports forms backbone for financial planning, analysis,
bench marking and decision making. These are used for above
purposes by various stakeholders.
 Financial reporting helps organisations to raise capital both
domestic as well as overseas.
 On the basis of financials, the public in large can analyze the
performance of the Organization as well as of its management.
LIMITATIONS:  Information provided by financial reporting are approximate rather
than exact measures.
 Financial reporting are historical in nature.

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  Involve huge cost.

NON-FINANCIAL REPORTING:
It contains the information relating to the company’s performance during the previous year, future
projections, award achievements and penalty imposed, if any by any regulators, are apprised to the
Stake holders by way of reporting in the annual report.
Non-financial reporting is an opportunity to communicate in an open and transparent way with
stakeholders. In their non-financial reports, firms volunteer an overview of their environmental and
social impact during the previous year. The information in nonfinancial reports contributes to
building up a company’s risk-return profile.

BOARD’S REPORT:
The Companies Act, 2013, requires the Board of Directors of every company to attach its report to the
financial statements to be laid before the members at the annual general meeting. The Board’s
Report is an important means of communication, provides the stakeholders with both financial and
non-financial information. A board’s report should typically include information under following
heads:
 Company Specific Information
 General Information
 Corporate Social Responsibility (CSR)
 Risk Management
 Auditors Report
 Secretarial Audit Report
 Explanations in Response to Auditors’ Qualifications
 Compliance With Secretarial Standards
 Corporate Insolvency Resolution Process Initiated Under The Insolvency And Bankruptcy
Code, 2016 (IBC)
 Annual Return
 Failure to Implement any Corporate Action.
CORPORATE SOCIAL RESPONSIBILITY REPORT:
The Board of the Company is mandated to prepare a CSR Report under Section 134(3)(o) of the
Companies Act, 2013. The Companies (CSR Policy) Rules, 2014 provide for the format for reporting
CSR activities annually. The format for the annual report on CSR activities to be included in the
Board’s report is as follows:
 The Composition of the CSR Committee.
 Average net profit of the company for the last three financial years
 Prescribed CSR expenditure (two per cent, )
 Details of CSR spent during the financial year
 A brief outline of the company’s CSR policy, including overview of projects or programs
proposed to be undertaken and a reference to the web-link to the CSR policy and projects
or programs.
 Total amount to be spent for the financial year:
 Amount unspent, if any.

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CORPORATE SUSTAINABILITY REPORTING:
Corporate sustainability is an approach that creates long-term stakeholder value by implementing a
business strategy that considers every dimension of how a business operates in the ethical, social,
environmental, cultural, and economic spheres.
A sustainability report is an organizational report that gives information about economic,
environmental, social and governance performance. Sustainability reporting aims to communicate
an organization’s sustainability priorities, policies, programs and performance to its investors.
Sustainability reporting can be considered as synonymous with other terms for non-financial
reporting; triple bottom line reporting, corporate social responsibility (CSR) reporting, and more. It
is also an intrinsic element of integrated reporting; a more recent development that combines the
analysis of financial and non-financial performance.
BENEFITS: 1. Internal benefits of sustainability reporting for companies and
organizations can include:
 Increased understanding of risks and opportunities.
 Emphasizing the link between financial and non-financial
performance .
 Influencing long term management strategy and policy,
and business plans.
 Streamlining processes, reducing costs and improving
efficiency.
 Avoiding being implicated in publicized environmental,
social and governance failures
2. External benefits of sustainability reporting can include:
 Mitigating – or reversing – negative environmental, social
and governance impacts
 Improving reputation and brand loyalty
 Enabling external stakeholders to understand the
organization’s true value, and tangible and intangible assets
 Demonstrating how the organization influences, and is
influenced by, expectations about sustainable development

CHALLENGES IN MAINSTREAMING SUSTAINABILITY REPORTING

Government In many jurisdictions, there are no guidelines on sustainability reporting to
Encouragement: encourage the corporate sector. It is the need of the hour that governments
should encourage the corporate in their jurisdiction to adopt the
sustainability reporting as a measure of good corporate governance.
Awareness: lack of awareness about the emerging concept of sustainability reporting is
also a major challenge which the government and corporate governance
bodies need to address by organizing such awareness programme jointly
with the experts in the field of Sustainability Reporting.
Expertise Knowledge: Sustainability Reporting is relatively a new concept in many jurisdictions and
organization found it very difficult to prepare a sustainability report in the
absence of expert guidance on the subject.
Investor Behaviour: It is a recognized principle that investors should consider the Environmental,
Social and Governance (ESG) issues while making investment decisions.

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 However, the investor behaviour may vary from company to company and
sometimes they invest in companies without considering the ESG issues
either due to lack of awareness on ESG issues or some other business
reasons.
KEY DRIVERS
Regulations: Governments, at most levels is becoming more innovative and is covering
an ever wider range of activities. The most notable shift has been from
voluntary to mandatory sustainability, monitoring and reporting.
Customers: Public opinion and consumer preferences are a more abstract but powerful
factor that exerts considerable influence on companies, particularly those
that are consumer oriented.
Employees: Those who work for a company bring particular pressure to bear on how
their employers behave; they, too, are concerned citizens beyond their
corporate roles.
Investors: Increasingly, investors want to know that companies they have targeted
have responsible, sustainable, long-term business approaches.
NGO’s and the media: Public reaction comes not just from customers but from advocates and the
media, who shape public opinion. Advocacy organisations, if ignored or
slighted, can damage brand value.

GLOBAL REPORTING INITIATIVE - SUSTAINABILITY REPORTING FRAMEWORK

As for financial reporting, companies follow a generally accepted reporting framework; Global
Reporting Initiative (GRI) has developed a generally accepted framework to simplify report preparation
and assessment, helping both reporters and report users gain greater value from sustainability
reporting.

The aim of the Guidelines is to assist reporting organizations and their stakeholders in articulating and
understanding contributions of the reporting organizations to sustainable development.

The GRI Sustainability Reporting Framework is made up of the Sustainability Reporting Guidelines,
Sector supplements and Indicator Protocols. Together these are known as the Sustainability Reporting
Framework.

Sustainability Reporting Guidelines:

The Sustainability Reporting Guidelines are the core element of the Reporting Framework. They outline
content that is broadly relevant to all organizations regardless of size, sector or location. The
Sustainability Reporting Guidelines developed by the Global Reporting Initiative, is a significant system
that integrates sustainability issues in to a frame of reporting.

G4 is applicable to all organizations, large and small, across the world. The Guidelines are now
presented in two parts to facilitate the identification of reporting requirements and related guidance. It
consist of following two parts

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  Part 1- Reporting Principles and Standard Disclosures: It contains the reporting principles and
standard disclosures and also sets out the criteria to be applied by an organization to prepare its
sustainability report in accordance with the Guidelines.
 Part 2 - Implementation Manual: It contains reporting and interpretative guidance that an
organization should consult when preparing its sustainability report.

SUSTAINABILITY REPORTING FRAMEWORK IN INDIA

Considering the importance of sustainability in businesses, MCA launched Corporate Social

Responsibility Voluntary Guidelines in 2009. This voluntary CSR Policy addresses six core elements –
Care for all Stakeholders, Ethical functioning, Respect for Workers’ Rights and Welfare, Respect for
Human Rights, Respect for Environment and Activities for Social and Inclusive Development. To take
this further, in 2011 MCA issued ‘National Voluntary Guidelines on Social, Environmental and
Economical Responsibilities of Business’ which encourages reporting on environment, social and
governance issues.

National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business and
considering the larger interest of public disclosure regarding steps taken by listed entities from a
Environmental, Social and Governance (“ESG”) perspective, SEBI decided to mandate inclusion of
Business Responsibility Reports (“BRR reports”) as part of the Annual Reports for listed entities.

SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has mandated the
requirement of submission of BRR for top 500 listed entities describing initiative taken by them from an
environmental, social and governance perspective in the prescribed format [Regulation 34(2)(f)].

The BRR framework is divided into five sections:

 Section A: General Information about the Organisation – Industry Sector, Products & Services,
Markets, other general information
 Section B: Financial Details of the Organisation – Paid up capital, Turnover, Profits, CSR
(Corporate Social Responsibility) spend.
 Section C: Other Details – BR initiatives at Subsidiaries and Supply-chain Partners
 Section D: BR Information – Structure, Governance & Policies for Business Responsibility
 Section E: Principle-wise Performance – Indicators to assess performance on the 9 Business
Responsibility principles as envisaged by the National Voluntary Guidelines (NVGs).

1. Section A: General Information about the Company:

 Corporate Identity Number (CIN) of the Company
 Name of the Company 3. Registered address
 Website
 E-mail id
 Financial Year reported.

2. Section B: Financial Details of the Company:

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  Paid up Capital (INR)
 Total Turnover (INR)
 Total profit after taxes (INR)
 Total Spending on Corporate Social Responsibility (CSR) as percentage of profit after tax
(%).

3. Section C: Other Details:

 Does the Company have any Subsidiary Company/ Companies?
 Do the Subsidiary Company/Companies participate in the BR Initiatives of the parent
company? If yes, then indicate the number of such subsidiary company(s)
 Do any other entity/entities (e.g. suppliers, distributors etc.) that the Company does
business with, participate in the BR initiatives of the Company? If yes, then indicate the
percentage of such entity/ entities? [Less than 30%, 30-60%, More than 60%].
4. Section D: BR Information:
 Details of Director/Directors responsible for BR
 Details of the Director/Director responsible for implementation of the BR
policy/policies
 DIN Number
 Name
 Designation

 Details of the BR head.

5. Section E: Principle-wise performance:

Principle 1:
 Does the policy relating to ethics, bribery and corruption cover only the company? Yes/
No. Does it extend to the Group/Joint Ventures/ Suppliers/Contractors/NGOs /Others?
 How many stakeholder complaints have been received in the past financial year and
what percentage was satisfactorily resolved by the management? If so, provide details
thereof, in about 50 words or so.

Principle 2:

 List up to 3 of your products or services whose design has incorporated social or

environmental concerns, risks and/or opportunities.
 .
 .
 .
 Does the company have procedures in place for sustainable sourcing (including
transportation)? If yes, what percentage of your inputs was sourced sustainably? Also,
provide details thereof, in about 50 words or so.

Principle 3:

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  Please indicate the Total number of employees.
 Please indicate the Total number of employees hired on
temporary/contractual/casual basis.
 Please indicate the Number of permanent women employees.
 Please indicate the Number of permanent employees with disabilities.
 Do you have an employee association that is recognized by management.

Principle 4:

 Has the company mapped its internal and external stakeholders? Yes/No
 Out of the above, has the company identified the disadvantaged, vulnerable &
marginalized stakeholders.
 Are there any special initiatives taken by the company to engage with the
disadvantaged, vulnerable and marginalized stakeholders. If so, provide details thereof,
in about 50 words or so.
Principle 5:
 Does the policy of the company on human rights cover only the company or extend to
the Group/Joint Ventures/Suppliers/Contractors/NGOs/Others?
 How many stakeholder complaints have been received in the past financial year and
what percent was satisfactorily resolved by the management?

Principle 6:
 Does the policy related to Principle 6 cover only the company or extends to the
Group/Joint Ventures/ Suppliers/Contractors/NGOs/others.
 Does the company have strategies/ initiatives to address global environmental issues
such as climate change, global warming, etc? Y/N. If yes, please give hyperlink for
webpage etc.
 Does the company identify and assess potential environmental risks? Y/N
 Does the company have any project related to Clean Development Mechanism? If so,
provide details thereof, in about 50 words or so. Also, if Yes, whether any environmental
compliance report is filed?
 Has the company undertaken any other initiatives on – clean technology, energy
efficiency, renewable energy, etc. Y/N. If yes, please give hyperlink for web page etc.
 Are the Emissions/Waste generated by the company within the permissible limits given
by CPCB/SPCB for the financial year being reported?
 Number of show cause/ legal notices received from CPCB/SPCB which are pending
(i.e. not resolved to satisfaction) as on end of Financial Year.

Principle 7:
 Is your company a member of any trade and chamber or association? If Yes, Name
only those major ones that your business deals with:
 .
 .
 .

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  Have you advocated/lobbied through above associations for the advancement or
improvement of public good? Yes/No; if yes specify the broad areas ( drop box:
Governance and Administration, Economic Reforms, Inclusive Development Policies,
Energy security, Water, Food Security, Sustainable Business Principles, Others)

Principle 8:
 Does the company have specified programmes/initiatives/projects in pursuit of the
policy related to Principle 8? If yes details thereof.
 Are the programmes/projects undertaken through in-house team/own
foundation/external NGO/ government structures/any other organization?
 Have you done any impact assessment of your initiative?
 What is your company’s direct contribution to community development projects-
Amount in INR and the details of the projects undertaken.

Principle 9:
 What percentage of customer complaints/consumer cases are pending as on the end
of financial year.
 Does the company display product information on the product label, over and above
what is mandated as per local laws? Yes/No/N.A. /Remarks(additional information)
 Is there any case filed by any stakeholder against the company regarding unfair trade
practices, irresponsible advertising and/or anti-competitive behaviour during the last
five years and pending as on end of financial year. If so, provide details thereof, in about
50 words or so.
 Did your company carry out any consumer survey/ consumer satisfaction trends?

National Guidelines on Responsible Business Conduct (NGRBC)

The Ministry of Corporate Affairs has revised the National Voluntary Guidelines on Social, Environmental
and Economic Responsibilities of Business, 2011 (NVGs) and has released the National Guidelines on
Responsible Business Conduct (NGRBC) in March 2019. These guidelines urge businesses to actualise the
principles in letter and spirit. This annexure 3 of the Guidelines details the reporting framework
associated with the National Guidelines for Responsible Business Conduct. It consists of three sections:

 Section A – General Disclosures, covering operational, financial and ownership related

information,
 Section B – Management and Process Disclosures covering the structures, policies and
processes to integrate the Guidelines, and
 Section C – Principle-wise Performance Indicators covering how well businesses are performing
in pursuit of these Guidelines.

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CHALLENGES IN MAINSTREAMING SUSTAINABILITY REPORTING
Since the Sustainability Reporting is relatively a new concept, many organizations find it difficult to
prepare sustainability. Following may be considered as the challenges in mainstreaming sustainability
reporting:

1. Government Encouragement: In many jurisdictions, there are no guidelines on sustainability

reporting to encourage the corporate sector. While on the other hand, there are voluntary as
well as mandatory guidelines from regulators for reporting on Sustainability aspects like in India
we have SEBI framework of Business Responsibility Report. In South Africa, listed companies are
required to prepare Integrated Report which is one step ahead of sustainability reporting. It is
the need of the hour that governments should encourage the corporate in their jurisdiction to
adopt the sustainability reporting as a measure of good corporate governance.
2. Awareness: lack of awareness about the emerging concept of sustainability reporting is also a
major challenge which the government and corporate governance bodies need to address by
arranging the sustainability awareness programme for the Professionals, Board of Directors and
Management in the corporate sector, as these are the persons who will drive sustainability
reporting initiative for an organisation. The government/regulators should organize such
awareness programme jointly with the experts in the field of Sustainability Reporting.
3. Expertise Knowledge: Sustainability Reporting is relatively a new concept in many jurisdictions
and organization found it very difficult to prepare a sustainability report in the absence of expert
guidance on the subject. The Sustainability Reporting concept is emerging as a good tool to
showcase the corporate governance practices of an orgainsation and this area demand
professionals having expert knowledge of sustainability reporting. The professional bodies in
various jurisdictions should impart the expert knowledge of sustainability reporting to their
members to develop a good cadre of experts in this emerging area of sustainability reporting.
4. Investor Behaviour: It is a recognized principle that investors should consider the
Environmental, Social and Governance (ESG) issues while making investment decisions. There
are specific regulators guidelines for the institutional investor to be vigilant on voting aspects
and be concerned about the governance practices of the companies in which they invest.
However, the investor behaviour may vary from company to company and sometimes they
invest in companies without considering the ESG issues either due to lack of awareness on ESG
issues or some other business reasons. It should be made a practice that the investor fund flow
to those organization following the good governance including reporting on sustainability
aspects.

INTEGRATED REPORTING
MEANING: The International Integrated Reporting Council (IIRC) defines integrated
reporting as “a process that results in communication by an organisation,
most visibly a periodic integrated report, about how an organisation’s
strategy, governance, performance, and prospects lead to the creation of
value over the short, medium and long-term.”

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PURPOSE: The primary purpose of an integrated report is to explain to providers of
financial capital how an organisation creates value over time. An integrated
report benefits all stakeholders interested in an organisation’s ability to
create value over time, including employees, customers, suppliers, business
partners, local communities, legislators, regulators and policy-makers.
FRAMEWORK:  Identifies information to be included in an integrated report for use
in assessing the organization’s ability to create value; it does not set
benchmarks for such things as the quality of an organization’s
strategy or the level of its performance .
 Is written primarily in the context of private sector, for-profit
companies of any size but it can also be applied, adapted as
necessary, by public sector and not-for-profit organizations.
Guiding Principles:  Strategic focus and future orientation
 Connectivity of information
 Stakeholder relationships
 Materiality
 An integrated report should be concise.
 Consistency and comparability.

Integrated Reporting by Listed Entities in India

Also regulation 4(1)(d) of SEBI LODR states “the listed entity shall provide adequate and timely
information to recognised stock exchange(s) and investors”. IOSCO Principle 16 states “there should be
full, accurate and timely disclosure of financial results, risks and other information that is material to
investors´ decisions.”

The purpose of integrated reporting is to provide shareholders and interested stakeholders with
relevant information that is useful for making investment decisions.

All organizations depend on various forms of capital for their success. It is important that all such forms
of capital are disclosed to stakeholders to enable informed investment decision making. IIRC has
categorized the forms of capital as follows:
 Financial capital
 Manufactured capital
 Intellectual capital
 Human capital
 Social and relationship capital
 Natural capital

It has been observed that certain listed entities in India and other jurisdictions have already been
making disclosures by following the principles of integrated reporting. Towards the objective of
improving disclosure standards, in consultation with industry bodies and stock exchanges, the listed
entities have been advised to adhere to the following by the SEBI vide this circular:

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  Integrated Reporting may be adopted on a voluntary basis from the financial year 2017-18 by
top 500 companies which are required to prepare BRR.
 The information related to Integrated Reporting may be provided in the annual report
separately or by incorporating in Management Discussion & Analysis or by preparing a separate
report (annual report prepared as per IR framework).
 In case the company has already provided the relevant information in any other report
prepared in accordance with national/international requirement / framework, it may provide
appropriate reference to the same in its Integrated Report so as to avoid duplication of
information.
 As a green initiative, the companies may host the Integrated Report on their website and
provide appropriate reference to the same in their Annual Report.

RELATION BETWEEN INTEGRATED REPORTING AND SUSTAINABILITY REPORTING

Sustainability reporting is a process that assists organizations in setting goals, measuring performance
and managing change towards a sustainable global economy – one that combines long term
profitability with social responsibility and environmental care. Sustainability reporting – mainly
through but not limited to a sustainability report – is the key platform for communicating the
organization’s economic, environmental, social and governance performance, reflecting positive and
negative impacts. The Aspects that the organization deems to be material, in response to its
stakeholders’ expectations and interests, drive sustainability reporting. Stakeholders can include those
who are invested in the organization as well as those who have other relationships with the
organization.

Integrated reporting is an emerging and evolving trend in corporate reporting, which in general aims
primarily to offer an organization’s providers of financial capital with an integrated representation of
the key factors that are material to its present and future value creation. Integrated reporters build on
sustainability reporting foundations and disclosures in preparing their integrated report. Through the
integrated report, an organization provides a concise communication about how its strategy,
governance, performance and prospects lead to the creation of value over time. Therefore, the
integrated report is not intended to be an extract of the traditional annual report nor a combination of
the annual financial statements and the sustainability report. However, the integrated report interacts
with other reports and communications by making reference to additional detailed information that is
provided separately.

Although the objectives of sustainability reporting and integrated reporting may be different,
sustainability reporting is an intrinsic element of integrated reporting. Sustainability reporting considers
the relevance of sustainability to an organization and also addresses sustainability priorities and key
topics, focusing on the impact of sustainability trends, risks and opportunities on the long term
prospects and financial performance of the organization. Sustainability reporting is fundamental to an
organization’s integrated thinking and reporting process in providing input into the organization’s
identification of its material issues, its strategic objectives, and the assessment of its ability to achieve
those objectives and create value over time.

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 SOME EXAMINATION QUESTIONSS

1. What is Integrated Reporting?

2. Apart from the Financial Reporting, Non-financial reporting has become an integral part of
the Annual Report. Please elucidate.
3. Discuss the limitations of financial reporting .
4. What is a Sustainability Report?
5. Discuss the integrated reporting by listed entities in India.

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 CHAPTER 16
Ethics and Business
ETHICS As per the Oxford Dictionary the meaning of ethics is a “system of moral
principles, rules and conduct.”. Ethics is a “Science of morals.” The word ethics
has emerged from Latin ‘Ethicus’ or in Greek ‘Ethicos’. The origin of these two
words is from ‘ethos’ meaning character.

MEANING Ethics refers to well-founded standards of right and wrong that prescribe
what humans ought to do, usually in terms of rights, obligations, benefits to
society, fairness, or specific virtues.
BUSSINESS ETHICS Business ethics constitute the ethical/moral principles and challenges that
arise in a business environment. Business Ethics is the application of ethical
principles and methods of analysis to business.

Finance and Human Resources Sales and

Accounting and Management Marketing
• Creative •Whistle blowing •Price fixing
accounting •Union busting •Green washing
• Insider trading

FIVE BOTTOM LINES OF FUTURE

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 Wealth-creation is the most basic and fundamental dharma of business. A
business organization which doesn’t create wealth for the society is adharmic,
Economic Bottomline: unethical. We have to focus more on the causative factors which lead to these
economic goals like for example: Technology, Productivity, Quality, Customer,
Service, Innovation or “knowledge”. These are the key-factors of the Economic
Bottomline.

The Key Result Areas in this domain are those factors which lead to a better
Human Bottomline: quality of the work-force like for example: Leadership, Teamwork, Motivation,
Creativity, Ethics, Values and Wellness.

An organization is an integral part of the larger social environment. In the long-

Social Bottomline: term, wellbeing of the organization depends on the wellbeing of the society.
This is the rationale behind the concept of Corporate Social Responsibility
(CSR) which is gaining increasing acceptance among corporate leaders.
However, here also the concept and practice of CSR has to progress beyond
isolated charitable projects to embrace the community as a whole.

We are not only part of society but also part of Nature. Any human group
Environmental
which draws energy and resources from Nature has a responsibility to use
Bottomline:
them prudently within the laws and limits set by Nature. Here again as with
CSR, the highest aim of ecological responsibility is to harmonize the
communal life of the group (especially the economic and material life) and
the resource-energy management strategies, with the laws of Nature and the
natural environment.

Evolutionary We humans, as a species, are an unfinished project. We have not yet realized
Bottomline: all our potentialities hidden within us, especially in the moral, psychological
and spiritual realms of our consciousness. We have to progress or evolve
further to reach our highest potential as human being. The work and life of the
modern corporate world provides a rich field of experience not only for
professional growth but also for evolution of the individual. The problems,
difficulties, challenges, temptation and conflicts of the corporate world, are a
fertile arena for becoming fully conscious of our weaknesses and strengths and
also for expressing our inner potentialities.

ORGANISATION STRUCTURE AND ETHICS

centralized Decision making authority is concentrated in the hands of top-level managers,

organization: and very little authority is delegated to the lower levels. It is also suitable for
organizations in which production processes are routine and efficiency is of
primary importance. These organizations are usually extremely bureaucratic,
and the division of labour is typically very well defined. Centralized
organizations stress on formal rules, policies, and procedures, backed up by
elaborate control systems.

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Decentralized Decision-making authority is delegated as far down the chain of command as
organization: possible. Such organizations have relatively few formal rules, coordination
and control are usually informal and personal. They focus on increasing the
flow of information. As a result, one of the main strengths of decentralized
organizations is their adaptability and early recognition of external change. This
provides greater flexibility to managers and they can react quickly to changes
in their ethical environment. Weakness of decentralized organizations lies in
the fact that they have difficulty in responding quickly to changes in policy and
procedures established by the top management. In addition, independent
profit centers within a decentralized organization may sometimes deviate from
organizational objectives.

Organisational issues  The alienation experienced by workers doing repetitive work.

related to ethics:  Health problems created by unsafe working condition.
 The feelings of oppression created by the exercise of authority .
 The responsibilities heaped on the shoulders of managers.

Four fundamental ethical principles

1. The Principle Autonomy is Latin for “self-rule” We have an obligation to respect the
of Respect for autonomy of other persons, which is to respect the decisions made by other
autonomy : people concerning their own lives. This is also called the principle of human
dignity. Corollary principles: honesty in our dealings with others & obligation to
keep promises.
2. The Principle
We have an obligation to bring about good in all our actions. Corollary
of
principle :We must take positive steps to prevent harm.
Beneficence:

3. The Principle We have an obligation not to harm others: “First, do no harm. Corollary
of principle: Where harm cannot be avoided, we are obligated to minimize the
nonmaleficen harm we do.
ce:

We have an obligation to provide others with whatever they are owed or

4. The Principle
deserve. In public life, we have an obligation to treat all people equally, fairly,
of justice:
and impartially. Corollary principle: Impose no unfair burdens.

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ETHICAL DILEMMA
MEANING:
Dilemma is a situation that requires a choice between options that are or seem
equally unfavorable or mutually exclusive. By definition, an ethical dilemma
involves the need to choose from among two or more morally acceptable
courses of action, when one choice prevents selecting the other; or, the need
to choose between equally unacceptable alternatives.

A dilemma could be a right vs. wrong situation in which the right would be
more difficult to pursue and wrong would be more convenient. A right versus
wrong dilemma is not so easy to resolve. It often involves an apparent conflict
between moral imperatives, in which to obey one would result in transgressing
the other. This is also called an ethical paradox.

The ethical dilemma consideration takes us into the grey zone of business and
professional life, where things are no longer black or white and where ethics
has its vital role today.

Steps to Resolving an Ethical Dilemma

1. Considering the options available: List the alternative courses of action
available.
2. Considering Consequences – positives and negatives of each option :
Think carefully about the range of positive and negative consequences
associated with each of the different paths of action available.
3. Analysing Actions: Actions should be analysed in a different
perspective . How do the options measure up against moral principles
like honesty, fairness, equality, and recognition of social and
environmental vulnerability? In the case you are considering, is there a
way to see one principle as more important than the others?
4. Decision Making and Commitment: Once the decision is made, act on
the decision assuming responsibility for it.
5. Evaluate the System: Think about the circumstances which led to the
dilemma with the intention of identifying and removing the conditions
that allowed it to arise.

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CODE OF ETHICS: Managers at all levels and in all functional areas face ethical issues.
Organisations, formulate both business and non-business guidelines in the
form of a code of conduct or code of ethics. The need for a corporate code of
conduct has increased due to frequent corporate scandals, inside trading and
misuse of funds. The Institute of Company Secretaries of India, Medical
Council of India, Bar Council, All India Management Association (AIMA) and
other professional bodies have their own professional codes. A code of ethics
should reflect top managements’ desire for compliance with the values, rules,
and policies that support an ethical climate. The development of a code of
ethics should involve the President, Board of Directors, and Chief Executive
Officers who should be implementing the code.

The six values that are desirable for codes of ethics include:

 trustworthiness,
 respect,
 responsibility,
 fairness,
 caring, and
 citizenship.

In the United States of America, Section 406 of the Sarbanes Oxley Act, 2002
requires public companies to disclose whether they have codes of ethics, and
also to disclose any waivers of those codes for certain members of senior
management. Section 406(a) of the Regulation requires companies to
disclose: –
 whether they have a written code of ethics that applies to their
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions.
 any waivers of the code of ethics for these individuals.
 any changes to the code of ethics.
 If companies do not have a code of ethics, they must explain why they
have not adopted one. A company may file its codes as an exhibit in
the annual report, post the codes on the company’s website, or agree
to provide a copy of the codes upon request and without charge.

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CODE OF CONDUCT: The Code of conduct or what is popularly known as the Code of Business
Conduct contains standards of business conduct that must guide actions of
the Board of Directors and senior management of the company. The Code of
Conduct outlines specific behaviours that are required or prohibited as a
condition of ongoing Employment.
A well-written code of conduct clarifies an organization’s mission, values and
principles, linking them with standards of professional conduct. The code
articulates the values the organization wishes to foster in leaders and
employees and, in doing so, defines desired behavior. As a result, written codes
of conduct or ethics can become benchmarks against which individual and

organizational performance can be measured.organizational performance can

be measured. The code of conduct may include the following:
 Company Values.
 Avoidance of conflict of interests .
 Accurate and timely disclosure in reports and documents that the
company files before Government agencies, as well as in the
company’s other communications .
 Compliance of applicable laws, rules and regulations including
Insider Trading Regulations .
 Maintaining confidentiality of the company affairs.

BASIS FOR CODE OF ETHICS CODE OF CONDUCT

COMPARISON
(a) Meaning: An aspirational A directional
document, issued document
by the board of containing
directors specific practices
containing core and behavior,
ethical values, that are followed
principles and or restricted
ideals of the under the
organization is organization is
Code of Ethics. Code of Conduct.
(a) Nature: General Specific
(b) Scope: Wide Narrow
(c) Disclosures: Publicly disclosed Employees
(d) Focused on: Values or Principles

Both a Code of Ethics and a Code of Conduct are similar as they are used in an
attempt to encourage specific forms of behaviour by employees. Ethics
guidelines attempt to provide guidance about values and choices to influence
decision making. Conduct regulations assert that some specific actions are
appropriate, others in appropriate. In both cases, the organization’s desire is to

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 General Moral Imperatives
This principle concerning the quality of life of all people affirms an obligation to
protect fundamental human rights and to respect the diversity of all cultures.
We must attempt to ensure that the products of our efforts will be used in
socially responsible ways, will meet social needs and will avoid harmful effects
to health and welfare of others.
“Harm” means injury or negative consequences, such as loss of property,
property damage or unwanted health and environmental impacts. This
principle prohibits use of men, material and technology in ways that result in
harm to our consumers, employees and the general public.

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INDIAN ETHOS The essence of good governance and leadership lies not in the paraphernalia
of systems and procedures but on the quality of people who create, govern or
operate the systems. In Indian ethos it is known as Swadharma of each
individual.
The present ethical debate in the corporate world is focused mostly on values
like honesty, integrity, fairness or transparency. But the scope of ethics is not
confined to these values only.

ADVANTAGES OF A company that adheres to ethical values and dedicatedly takes care of its
BUSINESS ETHICS employees is rewarded with equally loyal and dedicated employees.

 Attracting and retaining talent: People aspire to join organizations that

have high ethical values. Such companies are able to attract the best
talent. The ethical climate matters a lot to the employees.
 Investor Loyalty: Investors are concerned about ethics, social
responsibility and reputation of the company in which they invest.
Investors are becoming more and more aware that an ethical climate
provides a foundation for efficiency, productivity and profits.
 Customer satisfaction: Customer satisfaction is a vital factor of a
successful business strategy. Repeated purchases/orders and an
enduring relationship with mutual respect is essential for the success of
the company.
 Regulators:
 Shareholders invest their money into a company and expect a
certain level of return from that money in the form of
dividends and/or capital growth.
 Customers pay for goods, give their loyalty and enhance a
company’s reputation in return for goods or services that meet
their needs.

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 SOME EXAMINATION QUESTIONS

1. Discuss about the influence of organization climate and organizational structure on the
ethics programme of a company.
2. Describe Ethical Dilemma.
3. What are the advantages of Business Ethics for an organization?
4. What are the objectives and advantages of a Code of Conduct for a company?
5. What is the difference between a Code of ethics and a Code of Conduct?
 CHAPTER 17
CSR and Sustainability

CORPORATE SOCIAL RESPONSIBILITY (CSR)

CSR: The vedic philosophy of “Sarva loka hitam” i.e. ‘‘the well-being of all stakeholders”, has regained
importance in the current business environment. The concept has evolved over the years and now used
as strategy and a business opportunity to earn stakeholder goodwill.
Essentially, Corporate Social Responsibility is an inter-disciplinary subject in nature and encompasses
in its fold:
 Social, economic, ethical and moral responsibility of companies and managers,
 Compliance with legal and voluntary requirements for business and professional practice,
 Challenges posed by needs of the economy and socially disadvantaged groups, and
 Management of corporate responsibility activities.

WHY CSR AT ALL?  CSR creates a favourable public image, which attracts customers.
Reputation or brand equity of the products of a company which
understands and demonstrates its social responsibilities is very high.
 Corporate Social Responsibility (CSR) activities have its advantages.
It builds up a positive image encouraging social involvement of
employees, which in turn develops a sense of loyalty towards the
organization, helping in creating a dedicated workforce proud of its
company.
 Public needs have changed leading to changed expectations from
consumers. The industry/ business owes its very existence society
and has to respond to needs of the society.
 The company’s social involvement discourages excessive regulation
or intervention from the Government or statutory bodies, and
hence gives greater freedom and flexibility in decision-making.
 The internal activities of the organisation have an impact on the
external environment, since the society is an inter-dependent
system.
 In a number of jurisdictions, governments have expedited approval
processes for firms that have undertaken social and environmental
activities beyond those required by regulation.
FACTORS Many factors and influences, including the following, have led to increasing
INFLUENCING CSR attention being devoted to CSR:
 Globalization – coupled with focus on cross-border trade,
multinational enterprises and global supply chains – is increasingly
raising CSR concerns related to human resource management
practices, environmental protection, and health and safety, among
other things.
  Governments and intergovernmental bodies, such as the United
Nations, the Organisation for Economic Co-operation and
Development and the International Labour Organization have
developed compacts, declarations, guidelines, principles and other
instruments that outline social norms for acceptable conduct.
 Citizens in many countries are making it clear that corporations
should meet standards of social and environmental care, no matter
where they operate.
 There is increasing awareness of the limits of government
legislative and regulatory initiatives to effectively capture all the
issues that corporate social responsibility addresses.
 Businesses are recognizing that adopting an effective approach to
CSR can reduce risk of business disruptions, open up new
opportunities, and enhance brand and company reputation.
TRIPLE BOTTOM LINE  Within the broader concept of corporate social responsibility, the
APPROACH OF CSR concept of Triple Bottom Line (TBL) is gaining significance and
becoming popular amongst corporates.
 in 1997 by John Ellington, noted management consultant, the
concept of TBL is based on the premise that business entities have
more to do than make just profits for the owners of the capital, only
bottom line people understand.
 “People, Planet and Profit” is used to succinctly describe the triple
bottom lines.
 “People” (Human Capital) pertains to fair and beneficial business
practices toward labor and the community and region in which a
corporation conducts its business.
 “Planet” (Natural Capital) refers to sustainable environmental
practices. It is the lasting economic impact the organization has on
its economic environment A TBL company endeavors to benefit the
natural order as much as possible or at the least do no harm and
curtails environmental impact.
 “Profit” is the bottom line shared by all commerce.
The need to apply the  Increased consumer sensitivity to corporate social behaviour
concept of TBL is  Growing demands for transparency from
caused due to – shareholders/stakeholders
 Increased environmental regulation
 Legal costs of compliances and defaults
 Concerns over global warming
 Increased social awareness
 Awareness about and willingness for respecting human rights
 Media’s attention to social issues.
GLOBAL PRINCIPLES A comprehensive guidance for companies pertaining to CSR is available in
AND GUIDELINES the form of several globally recognised guidelines, frameworks, principles
and tools, some of which are discussed below.
 The UN Guiding Principles on Business and Human Rights: The UN
guiding principles provide assistance to states and businesses to fulfil
 their existing obligations towards respecting and protecting human
rights and fundamental freedoms and comply with the existing laws.
These principles act as global standards for addressing the risk of
human rights violation related to business activity. In circumstances
when these laws are breached or the guidance is not adhered to,
suitable remedies have also been recommended.
 OECD Guidelines: Multinational enterprises: OECD Guidelines for
multinational enterprises elaborate on the principles and standards
for responsible business conduct for multinational corporations.
These guidelines were recently updated in 2011. They cover areas
such as employment, human rights, environment, information
disclosure, combating bribery, consumer interests, science and
technology, competition and taxation
 Institute of Social and Ethical Accountability: AccountAbility’s
AA1000 series of standards: This is a series of standards which
enable organisations to become accountable, responsible and
sustainable. It consists of the (i) AA1000 accountability principles
(AP) standard (ii) AA1000 assurance standard (AS) (iii) AA1000
stakeholder engagement (SE) standard.
 Social Accountability International (SAI): SA 8000 Standard: This is
one of the world’s first auditable social certification standard. It is
based on ILO, UN and national law conventions, and adopts a
management system approach in order to ensure that companies
that adopt this approach also comply with it. This standard ensures
the protection of basic human rights of workers. The nine basic
elements of this standard include (i) child labour (ii) forced and
compulsory labour (iii) health and safety (iv) freedom of
association and the right to collective bargaining (v) discrimination
(vi) disciplinary practices (vii) working hours (viii) remuneration (ix)
management systems.
 ISO 26000: Social responsibility: ISO 26000 is the international
standard giving guidance on social responsibility and is intended for
use by organizations of all types both public and private sectors, in
developed and developing countries. It covers six core areas of social
responsibility, including (i) human rights (ii) labour practices (iii)
environment (iv) fair operating practices (v) consumer issues (vi)
community involvement and development.
 The Global Compact Self Assessment Tool is an easy-to-use guide
designed for use by companies of all sizes and across sectors
committed to upholding the social and environmental standards
within their respective operations

CORPORATE SUSTAINABILITY
Sustainability means meeting of the needs of the present without compromising the ability of future
generations to meet theirs. It has three main pillars:
  economic,
 environmental, and
 social.

These three pillars are informally referred to as

 people,
 planet and
 profits.
These three Ps have its priority orders too. One should take first take care of the PEOPLE and thereafter
the PLANET. PROFIT is an economic activity and is much for the survivial of the unit, but in the array of
these three Ps, its priority should stand in last and not at the cost of People and Planet.

Sustainability is important to make sure that we have and will continue to have the water, materials,
and resources to protect human health and our environment.

Corporate sustainability indicates new philosophy, as an alternative to the traditional growth and
profitmaximization model, under which sustainable development comprising of environmental
protection, social justice and equity, and economic development are given more significant focus while
recognizing simultaneous growth of the corporate and profitability. It is a business approach that
creates long-term shareholder value by embracing opportunities and managing risks deriving from
economic, environmental and social developments.
Corporate sustainability encompasses strategies and practices that aim to meet the needs of the
stakeholders today while seeking to protect, support and enhance the human and natural resources that
will be the need of the future. Corporate sustainability leaders achieve long-term shareholder value.

Following key drivers
need to be garnered
to ensure
sustainability:
UNITED NATIONS
GLOBAL COMPACT’S
TEN PRINCIPLES, 2000
 Internal Capacity Building strength – In order to convert various
risks into competitive advantages.
 Social impact assessment – In order to become sensitive to various
social factors, like changes in culture and living habits.
 Repositioning capability through development and innovation:
Crystallisation of all activities to ensure consistent growth.
 Corporate sustainability is a business approach creating
shareholder value in the long run.
1. Principle 1: Businesses should support and respect the protection of
internationally proclaimed human rights; and
2. Principle 2: make sure that they are not complicit in human rights
abuses.
3. Principle 3: Businesses should uphold the freedom of association
and the effective recognition of the right to collective bargaining;
4. Principle 4: the elimination of all forms of forced and compulsory
labour;
5. Principle 5: the effective abolition of child labour; and
6. Principle 6: the elimination of discrimination in respect of
employment and occupation.
7. Principle 7: Businesses should support a precautionary approach to
 environmental challenges;
8. Principle 8: undertake initiatives to promote greater environmental
responsibility; and
9. Principle 9: encourage the development and diffusion of
environmentally friendly technologies.
10. Principle 10: Businesses should work against corruption in all its
forms, including extortion and bribery.

CSR AND SUSTAINABILITY IN INDIA

Corporate Social The Corporate Social Responsibility Voluntary Guidelines issued by the
Responsibility MCA in December 2009 was the first step towards mainstreaming the
Voluntary Guidelines, concept of Business Responsibilities. Through these Guidelines, the Ministry
2009 urged the business sector to adopt the principles contained in the
Guidelines for responsible business practices. It was recommendatory
initiative to underline that the business sector also needs to take the
responsibility of exhibiting socially responsible business practices that
ensures the distribution of wealth and well-being of the communities in
which the business operates.
National Voluntary Keeping in view the feedback from stakeholders, review of 2009 Guidelines
Guidelines on Social, was undertaken by the Guidelines Drafting Committee (GDC) constituted by
Environmental and the Indian Institute of Corporate Affairs, resulting into the formulation of
Economic 2011 Guidelines entitled “National Voluntary Guidelines on Social,
Responsibilities of Environmental and Economic Responsibilities of Business” to mainstream
Business – 2011 the subject of business responsibilities.
These guidelines were formulated keeping in view the diverse sectors within
which businesses operate, as well as the wide variety of business
organizations that exist in India today – from the small and medium
enterprises to large corporate organizations.
Principles and the core elements The principles and the core elements of each of the principles as
recommended by the National Voluntary Guidelines are summarized below:
Principles Core Elements
Principle 1: The principle recognizes that ethical conduct in all functions and processes
Businesses should is the cornerstone of responsible business.
conduct and govern
themselves with 1. Businesses should not engage in practices that are abusive, corrupt,
Ethics, Transparency or anti-competition.
and Accountability 2. Businesses should truthfully discharge their responsibility on
financial and other mandatory disclosures.
3. Businesses should report on the status of their adoption of these
Guidelines as suggested in the reporting framework in NVG’s.
4. Businesses should avoid complicity with the actions of any third
party that violates any of the principles contained in these
Guidelines.
Principle 2: The principle recognizes that all stages of the product life cycle, right from
Businesses should design to final disposal of the goods and services after use, have an impact
provide goods and on society and the environment. Responsible businesses, therefore, should
services that are safe engineer value in their goods and services by keeping in mind these impacts.
and contribute to 1. Businesses should assure safety and optimal resource use over the
sustainability life-cycle of the product – from design to disposal – and ensure
throughout their life that everyone connected with it- designers, producers, value chain
cycle members, customers and recyclers are aware of their
responsibilities.
2. In designing the product, businesses should ensure that the
manufacturing processes and technologies required to produce it
are resource efficient and sustainable.
3. Businesses should regularly review and improve upon the process of
new technology development, deployment and commercialization,
incorporating social, ethical, and environmental considerations.
4. Businesses should recognize and respect the rights of people who
may be owners of traditional knowledge, and other forms of
intellectual property.
Principle 3: The principle encompasses all policies and practices relating to the dignity
Businesses should and well being of employees engaged within a business or in its value chain.
promote the well 1. Businesses should respect the right to freedom of association,
being of all participation, collective bargaining, and provide access to
employees appropriate grievance redressal mechanisms.
2. Businesses should provide and maintain equal opportunities at the
time of recruitment as well as during the course of employment
irrespective of caste, creed, gender, race, religion, disability or
sexual orientation.
3. Businesses should not use child labour, forced labour or any form
of involuntary labour, paid or unpaid.
4. Businesses should take cognizance of the work-life balance of its
employees, especially that of women.
Principle 4: The principle recognizes that businesses have a responsibility to think and
Businesses should act beyond the interests of its shareholders to include all their stakeholders.
respect the interests 1. Businesses should systematically identify their stakeholders,
of, and be responsive understand their concerns, define purpose and scope of
towards all engagement, and commit to engaging with them.
stakeholders, 2. Businesses should acknowledge, assume responsibility and be
especially those who transparent about the impact of their policies, decisions, product &
are disadvantaged, services and associated operations on the stakeholders.
vulnerable and 3. Businesses should give special attention to stakeholders in areas
marginalized. that are underdeveloped.
4. Businesses should resolve differences with stakeholders in a just,
fair and equitable manner.
Principle 5: The principle takes into account the “Corporate Responsibility to Respect
Businesses should Human Rights”, as referred in the United Nations “Protect, Respect,
respect and promote Remedy” Framework.
human rights 1. Businesses should recognize and respect the human rights of all
relevant stakeholders and groups within and beyond the
workplace, including that of communities, consumers and
vulnerable and marginalized groups.
2. Businesses should, within their sphere of influence, promote the
awareness and realization of human rights across their value chain.
3. Businesses should not be complicit with human rights abuses by a
third party.
4. Businesses should understand the human rights content of the
Constitution of India, national laws and policies and the content of
International Bill of Human Rights. Businesses should appreciate
that human rights are inherent, universal, indivisible and
interdependent in nature.
Principle 6: Business The principle recognizes that environmental responsibility is a prerequisite
should respect, for sustainable economic growth and for the well being of society.
protect, and make 1. Businesses should utilize natural and manmade resources in an
efforts to restore the optimal and responsible manner and ensure the sustainability of
environment. resources by reducing, reusing, recycling and managing waste.
2. Businesses should take measures to check and prevent pollution.
They should assess the environmental damage and bear the cost of
pollution abatement with due regard to public interest.
3. Businesses should proactively persuade and support its value chain
to adopt this principle.
Principle 7: The principle recognizes that businesses operate within the specified
Businesses, when legislative and policy frameworks prescribed by the Government, which
engaged in guide their growth and also provide for certain desirable restrictions and
influencing public and boundaries.
regulatory policy, 1. Businesses, while pursuing policy advocacy, must ensure that their
should do so in a advocacy positions are consistent with the Principles and Core
responsible manner Elements contained in these Guidelines.
2. To the extent possible, businesses should utilize the trade and
industry chambers and associations and other such collective
platforms to undertake such policy advocacy.
Principle 8: The principle recognizes the value of the energy and enterprise of
Businesses should businesses and encourages them to innovate and contribute to the overall
support inclusive development of the country, especially to that of the disadvantaged,
growth and equitable vulnerable and marginalised sections of society.
development 1. Businesses should understand their impact on social and economic
development, and respond through appropriate action to minimise
the negative impacts.
2. Businesses should innovate and invest in products, technologies and
processes that promote the well being of society.
Principle 9: This principle is based on the fact that the basic aim of a business entity is to
Businesses should provide goods and services to its customers in a manner that creates value
engage with and for both.
provide value to their 1. Businesses, while serving the needs of their customers, should take
 customers and into account the overall well-being of the customers and that of
consumers in a society.
responsible manner 2. Businesses should ensure that they do not restrict the freedom of
choice and free competition in any manner while designing,
promoting and selling their products.
3. Businesses should provide adequate grievance handling
mechanisms to address customer concerns and feedback.

The Companies Act, 2013

The Act brought the concept of Corporate Social Responsibility in India to the forefront. It aimed to
promote greater transparency and disclosure. The Ministry of Corporate Affairs through Section 135 and
Schedule VII of the Companies Act 2013 as well as the Companies (Corporate Social Responsibility
Policy) Rules, 2014 mandated the provisions of the corporate social responsibility for certain classes of
companies.

SEBI (LODR) Regulations, 2015

In line with the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of
Business and considering the larger interest of public disclosure regarding steps taken by listed entities,
SEBI has mandated the requirement of submission of Business Responsibility Report (‘BRR’) for top 500
listed entities under Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirements)
Regulations 2015 (“SEBI LODR”).

National Guidelines on Responsible Business Conduct (NGRBC), 2019

In March 2019, the Ministry of Corporate Affairs has revised the National Voluntary Guidelines on Social,
Environmental and Economic Responsibilities of Business, 2011 (NVGs) and has released the National
Guidelines on Responsible Business Conduct (NGRBC). These guidelines urge businesses to actualise the
principles in letter and spirit.

The MCA has been taking various initiatives for ensuring responsible business conduct by companies. As
a first step towards mainstreaming the concept of business responsibility, the Voluntary Guidelines on
Corporate Social Responsibility were issued in 2009. These guidelines were subsequently revised as
National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business in
2011 after extensive consultations with business, academia, civil society organisations and the
government.

The nine thematic pillars of business responsibility provided by the NGBRC are
1. Businesses should conduct and govern themselves with integrity in a manner that is Ethical,
Transparent and Accountable.
2. Businesses should provide goods and services in a manner that is sustainable and safe.
3. Businesses should respect and promote the well-being of all employees, including those in
their value chains.
4. Businesses should respect the interests of and be responsive to all their stakeholders.

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 5. Businesses should respect and promote human rights.
6. Businesses should respect and make efforts to protect and restore the environment.
7. Businesses, when engaging in influencing public and regulatory policy, should do so in a
manner that is responsible and transparent.
8. Businesses should promote inclusive growth and equitable development.
9. Businesses should engage with and provide value to their consumers in a responsible
manner.

SUSTAINABLE DEVELOPMENT
SUSTAINABLE Sustainable development is a broad concept that balances the need for
DEVELOPMENT economic growth with environmental protection and social equity. It is a
process of change in which the exploitation of resources, the direction of
investments, the orientation of technological development, and institutional
change are all in harmony and enhance both current and future potential to
meet human needs and aspirations. Sustainable development is a broad
concept and it combines economics, social justice, environmental science
and management, business management, politics and law.
The goal of sustainable development is to maintain economic growth
without environment destruction. Exactly what is being sustained (economic
growth or the global ecosystem, or both) is currently at the root of several
debates, although many scholars argue that the apparent reconciliation of
economic growth and the environment is simply a green sleight of hand that
fails to address genuine environmental problems.
In 1987, a report of the World Commission on Environment and
Development (WCED) of the United Nations (popularly known as
Brundtland Report) first introduced the concept. The Commission describes
Sustainable Development as a process of change in which the exploitation of
resources, the direction of investments, the orientation of technological
development.
Four fundamental 1. Principle of Intergenerational equity: need to preserve natural
Principle of resources for the future generations.
Sustainable 2. Principle of sustainable use: use of natural resources in a prudent
Development manner without or with minimum tolerable impact on nature.
3. Principle of equitable use or intra-generational equity: Use of
agreed by the world
natural resources by any state / country must take into account its
community are:
impact on other states.
4. Principle of integration: Environmental aspects and impacts of
socio-economic activities should be integrated so that prudent use
of natural resources is ensured.

United Nations Conference on Human Environment

The United Nations Conference on the Human Environment (also known as the Stockholm Conference)
was an international conference convened under United Nations auspices held in Stockholm, Sweden

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from June 5-16,1972. It was the UN’s first major conference on international environmental issues, and
marked a turning point in the development of international environmental politics. One of the key issues
addressed was the use of CFCs (chlorofluorocarbons) which were thought to be responsible for the
depletion of the ozone layer. The Stockholm Conference laid a framework for future environmental
cooperation; led to the creation of global and regional environmental monitoring networks and the
creation of the United Nations Environment Programme.

United Nations Environment Programme

“To provide leadership and encourage partnership in caring for the environment by inspiring, informing,
and enabling nations and peoples to improve their quality of life without compromising that of future
generations.”

The major Milestones of the UNEP include: –

 1973 - Convention on International Trade in Endangered Species (CITES)

 1985 - Vienna Convention for the Protection of the Ozone Layer
 1987 - Montreal Protocol on Substances that Deplete the Ozone Layer
 1988 - Intergovernmental Panel on Climate Change (IPCC)
 1989 - Basel Convention on the Transboundary Movement of Hazardous Wastes
 1992 - UN Conference on Environment and Development (Earth Summit) publishes Agenda 21,
a blueprint for sustainable development
 1992 - Convention on Biological Diversity
 2000 - Malmö Declaration - first Global Ministerial Forum on the Environment calls for
strengthened international environmental governance
 2000 - Millennium Declaration - environmental sustainability was included as one of eight
Millennium Development Goals
 2002 - World Summit on Sustainable Development
 2004 - Bali Strategic Plan for Technology Support and Capacity Building
 2005 - World Summit outcome document highlights key role of environment in sustainable
development
 2012 - The United Nations Conference on Sustainable Development (Rio +20)
 2013-15 – High level Political Forum on Sustainable Development
 2015 – United Nations Sustainable Development Summit, 2015 (New York)

Brundtland Commission
The Brundtland Commission, formally the World Commission on Environment and Development
(WCED), known by the name of its Chairman Gro Harlem Brundtland, was convened by the United
Nations in 1983. The Commission was created to address growing concern “about the accelerating
deterioration of the human environment and natural resources and the consequences of that
deterioration for economic and social development.” In establishing the Commission, the UN General
Assembly recognized that environmental problems were global in nature and determined that it was in
the common interest of all nations to establish policies for sustainable development.

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The Report of the Brundtland Commission, Our Common Future, published in 1987, deals with
sustainable development and the change of policies needed for achieving that. The definition of this
term in the report is quite well known and often cited:

“Sustainable development is development that meets the needs of the present without compromising
the ability of future generations to meet their own needs.”

United Nations Conference on Environment and Development

The United Nations Commission on Sustainable Development (CSD) was established by the UN General
Assembly in December 1992 to ensure effective follow-up of United Nations Conference on
Environment and Development (UNCED) (known as the Earth Summit) held in Rio De Janeiro. The
following documents were the outcome of the Rio Summit:

 Agenda 21 – is a blueprint on how to make development socially, economically and

environmentally sustainable.
 The Rio Declaration on Environment and Development – it has 27 principles defining the rights
and responsibilities of nations as they pursue human development and well-being.
 A statement of forest principles – they guide the management, conservation and sustainable
development of all types of forests, as essential to economic development and the
maintenance of all forms of life.
 The United Nations Framework Convention on Climate Change – aims to stabilize greenhouse
gas concentrations in the atmosphere at levels that would prevent dangerous human induced
interference with the climate system.
 The Convention on Biological Diversity – it requires the countries to adopt ways and means to
conserve the variety of living species, and ensure that the benefits from using biological
diversity are equitably shared.
 Montreal Protocol on Substances that Deplete the Ozone Layer was designed to reduce the
production and consumption of ozone depleting substances.

Kyoto Protocol
The Kyoto Protocol, adopted at the third Conference of the Parties to the UNFCCC (COP 3) in Kyoto,
Japan, in 1997 came into force in 2005, is an international agreement linked to the United Nations
Framework Convention on Climate Change.
The targets cover emissions of the six main greenhouse gases, namely:

 Carbon dioxide (CO2);

 Methane (CH4);
 Nitrous oxide (N2O);
 Hydrofluorocarbons (HFCs);
 Perfluorocarbons (PFCs); and
 Sulphur hexafluoride (SF6).

Bali Roadmap

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At the 2007 United Nations Climate Change Conference in Bali, Indonesia in December, 2007, the
participating nations adopted the Bali Roadmap as a two-year process for finalizing a bindinig
agreement in 2009 in Denmark.

The Bali Road Map consists of a number of forward-looking decisions that represent the various tracks
essential to reaching a secure climate future. The Bali Road Map includes the Bali Action Plan, which
charts the course for a new negotiating process designed to tackle climate change, with the aim of
completing this by 2009. To conduct the process, a subsidiary body under the Convention called the Ad
Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA) was set up.

To discuss future commitments for industrialized countries under the Kyoto Protocol, the Conference of
the Parties serving as the Meeting of the Parties to the Kyoto Protocol established a working group in
December 2005, called the Ad Hoc Working Group on further Commitments for Annex I Parties under
the Kyoto Protocol (AWG-KP).

United Nations Conference on Sustainable Development, Rio+20

The United Nations Conference on Sustainable Development - or Rio+20 - took place in Rio de Janeiro,
Brazil on 20-22 June 2012. It resulted in a focused political outcome document which contains clear and
practical measures for implementing sustainable development.
In Rio, Member States decided to launch a process to develop a set of Sustainable Development Goals
(SDGs), which will build upon the Millennium Development Goals and converge with the post 2015
development agenda.
Following are some commitments adopted under Rio+20 outcome document:
1. Poverty Eradication: poverty eradication should be given highest priority within UN agenda;
2. Food Security and Nutrition and Sustainable Agriculture: commitment of the right of everyone
to have access to safe, sufficient and nutritious food, importance of sustainable agriculture and
recognition to the importance of addressing the access of rural communities to credit, financial
services, markets, land tenure, health care and social services;
3. Energy: critical role of energy in sustainable development – access to sustainable modern
energy contributes to poverty eradication, saves lives and improves health, essential to social
inclusion and gender equality.
4. Sustainable transport: importance of environmentally sound, safe and affordable
transportation as a means to improve social equity and health. Support development of
sustainable transport systems, notably public mass transportation systems. Acknowledge that
developing countries need assistance.
5. Sustainable cities: well planned and integrated cities can be economically, socially and
environmentally sustainable - including housing, safe and healthy living environment for all,
particularly the vulnerable; affordable and sustainable transport and energy, promotion and
protection of safe and green urban spaces, water and sanitation, air quality, decent jobs and
improved urban planning and slum upgrading. Recognize importance of mixed-use planning and
non-motorized mobility - including by promoting pedestrian and cycling infrastructures.
6. Health and population: Health is a precondition for an outcome of and an indicator of all three
dimensions of sustainable development. Sustainable development cannot be achieved in the
presence of high burden on communicable/non communicable diseases.

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 THE 2030 AGENDA FOR SUSTAINABLE DEVELOPMENT
Sustainable Development Goals

1. Goal 1. End poverty in all its forms everywhere

2. Goal 2. End hunger, achieve food security and improved nutrition and promote sustainable
agriculture
3. Goal 3. Ensure healthy lives and promote well-being for all at all ages
4. Goal 4. Ensure inclusive and equitable quality education and promote lifelong learning
opportunities for all
5. Goal 5. Achieve gender equality and empower all women and girls
6. Goal 6. Ensure availability and sustainable management of water and sanitation for all
7. Goal 7. Ensure access to affordable, reliable, sustainable and modern energy for all
8. Goal 8. Promote sustained, inclusive and sustainable economic growth, full and productive
employment and decent work for all
9. Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and
foster innovation
10. Goal 10. Reduce inequality within and among countries
11. Goal 11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Goal 12. Ensure sustainable consumption and production patterns
13. Goal 13. Take urgent action to combat climate change and its impacts*
14. Goal 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable
development
15. Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably
manage forests, combat desertification, and halt and reverse land degradation and halt
biodiversity loss
16. Goal 16. Promote peaceful and inclusive societies for sustainable development, provide access
to justice for all and build effective, accountable and inclusive institutions at all levels
17. Goal 17. Strengthen the means of implementation and revitalize the global partnership for
sustainable development SUSTAINABILITY.

SUSTAINABILITY INDICES
A. DOW-JONES SUSTAINABILITY INDEX: The Dow Jones Sustainability Indices are the first global
indices tracking the financial performance of the leading sustainability-driven companies
worldwide, it was launched in 1999. The Dow Jones Sustainability World Index (DJSI World)
comprises more than 300 companies that represent the top 10% of the leading sustainability
companies out of the biggest 2500 companies in the Dow Jones World Index. In addition to the
composite DJSI World, there are six specialized subset indexes excluding alcohol, ex gambling, ex
tobacco, ex armaments & firearms, ex alcohol, tobacco, gambling, armaments & firearms
indexes, and ex alcohol, tobacco, gambling armaments & firearms, and adult entertainment.

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 B. ENVIRONMENT, SOCIAL, GOVERNANCE (ESG) INDEX ESG describes the environmental, social
and corporate governance issues that investors are considering in the context of corporate
behaviour. Integration of ESG refers to the active investment management processes that
include an analysis of environmental, social, and corporate governance risks and opportunities
and sustainability aspects of company performance evaluation. The ESG index employs a unique
and innovative methodology that quantifies a company’s ESG practices and translates them into
a scoring system which is then used to rank each company against its peers in the market. Its
quantitative scoring system offers investors complete transparency on Environmental, Social &
governance issues of a company.

C. STANDARD & POOR’S ESG INDIA INDEX Standard & Poor’s ESG India index provides investors
with exposure to a liquid and tradable index of 50 of the best performing stocks in the Indian
market as measured by environmental, social, and governance parameters. The index employs a
unique and innovative methodology that quantifies a company’s ESG practices and translates
them into a scoring system which is then used to rank each company against their peers in the
Indian market. Its quantitative scoring system offers investors complete transparency. The
creation of the index involves a two step process, the first of which uses a multi-layered
approach to determine an ‘ESG’ score for each company. The second step determines the
weighting of the index by score. Index constituents are derived from the top 500 Indian
companies by total market capitalizations that are listed on National Stock Exchange of India
Ltd. (NSE). These stocks are then subjected to a screening process which yields a score based on
a company’s ESG disclosure practices in the public domain.

MEASURING BUSINESS SUSTAINABILITY

ALTMAN Z-SCORE  The Altman Z Score model is a financial model to predict the
likelihood of bankruptcy in a company. It was created by Edward I.
Altman, a professor at the Leonard N. Stern School of Business of
New York University.
 The formula helps to predict the probability of a firm to go into
bankruptcy within next two years
 Z-scores are used to predict corporate defaults and an easy-to-
calculate control measure for the financial distress status of
companies. The purpose of the Z Score Model is to measure a
company’s financial health and to predict the probability that a
company will collapse within 2 years.
 The Z-Score does not apply to every situation. It can only be used for
forecasting if a company being analyzed can be compared to the
database.
 Formula Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:

 A = working capital / total assets: -This ratio measures liquid

assets. The companies in trouble will usually experience
shrinking liquidity.

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  B = retained earnings / total assets: -This ratio calculates the
overall profitability of the company. Dwindling profitability is
a warning sign.
 C = earnings before interest and tax / total assets: -This
ratio shows how productive a company is in generating
earnings, relative to its size.
 D = market value of equity / total liabilities: - This ratio
suggests how far the company’s assets can decline before it
becomes technically insolvent (i.e., its liabilities become
higher than its assets).
 E = sales / total assets:-This is the asset turnover ratio and is
a measure of how effectively the firm uses its assets to
generate sales.
A Z score of greater than 2.99 means that the entity being measured is safe
from bankruptcy. A score of less than 1.81 means that a business is at
considerable risk of going into bankruptcy, while scores in between should
be considered a red flag for possible problems.

RISK-ADJUSTED Risk-adjusted return on capital (RAROC) is a profitability metric that can be

RETURN ON CAPITAL - used to analyse return in relation to the level of risk taken on. It can be
RAROC used to compare the performance of several investments with differing
levels of risk exposure. It should not be confused with RORAC (return on risk-
adjusted capital) which adjusts the capital invested based on the risks being
taken. RAROC instead adjusts the return itself. RAROC was developed by
Bankers Trust in the late 1970s and early 1980s in response to regulatory
interest in the capital ratios of financial institutions and the implementation
of capital adequacy regulations. RAROC is often used by banks to determine
the amount of capital required to support the bank’s activities.
RAROC system allocates capital for two basic reasons:

 Risk management
 Performance evaluation

Risk-adjusted return on capital (RAROC) is a modified return on investment

(ROI) figure that takes elements of risk into account. The formula used to
calculate RAROC is:

RAROC: Revenue-Expenses-Expected loss+Income from capital/Capital

Where:
 Income from capital = (capital charges) × (risk-free rate)
 This is calculated by multiplying capital charges by the risk-free rate.
This is because, since capital is set aside to support a risky
transaction, it should theoretically be invested in something ‘risk
free’.
 Expected loss is the average anticipated loss over the period being

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 measured. It will include the cost of doing business as well as any
loss incurred from default or operational risk.
 Capital means economic capital is the amount of capital that a
financial institution needs to ensure that the company remains
solvent. It should be sufficient to support any risks that the company
takes on.
ECONOMIC VALUE “Economic Value Added (EVA) is the net operating profit minus an
ADDED (EVA) appropriate charge for the opportunity cost of all capital invested in an
enterprise or project. It is an estimate of true economic profit, or amount
by which earnings exceed or fall short of the required minimum rate of
return investors could get by investing in other securities of comparable risk
(Stewart, 1990).”
EVA is net operating profit after tax less capital charge. Or,
EVA = NOPAT- (Invested Capital × WACC).
MARKET VALUE Market Value Added (MVA) is a tool to measure shareholder’s value at a
ADDED (MVA) particular moment; this was introduced by Stewart in 1991. Market Value
Added (MVA) is the additional market capitalization over and above the
book value of equity (Gupta & Kundu, 2008). From an investor’s point of
view, MVA is the best final measure of a Company’s performance.

It is typically used for companies that are larger and publicly-traded. MVA is
not a performance metric like EVA, but instead is a wealth metric,
measuring the level of value a company has accumulated over time.

In another words Market Value Added (MVA) is the difference between the
current market value of a firm (V) and the capital contributed by its
investors (K):
Market Value Added (MVA) = V – K

The link between EVA and MVA is that MVA is the present value of all the
future EVAs a Company is expected to generate, discounted at the WACC.

Market Value Added (MVA) = PV (EVA) Theoretically, MVA is equal to the

present value of all future EVAs.
SUSTAINABLE VALUE Traditionally, an enterprise focuses on value maximization. The
ADDED conventional management takes into account just one dimension –
economic – when creating value in an enterprise. All resources including
environmental and social resources are neglected. This point of view is not
acceptable when speaking about sustainable development. Over the last
decades, theorists emphasize wider scope of entrepreneurial objectives
besides obtaining the greatest value possible.

Sustainable development is a normative concept laid out as the combination

of economic prosperity, environmental integrity and social equity.Value is
created whenever benefits exceed costs. Sustainable Value Added takes into
account both, the efficiency and the absolute level (effectiveness) of

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resource use. It has never been more important for businesses to use their
economic, environmental and social resources efficiently. Conceptually, SVA
stresses the complementary disposition of economic, environmental and
social resources. Sustainable Value Added is the extra value created when
the overall level of environmental and social impacts is kept constant.

Current approaches to measure corporate sustainable performance take into

account external costs caused by environmental and social damage or focus
on the ratio between value creation and resource consumption.

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 SOME EXAMINATION QUESTIONS

1. Discuss about the influence of organization climate and organizational structure on the ethics
programme of a company.
2. Describe Ethical Dilemma.
3. What are the advantages of Business Ethics for an organization?
4. What are the objectives and advantages of a Code of Conduct for a company?
5. What is the difference between a Code of ethics and a Code of Conduct?

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 CHAPTER 18
Anti-Corruption and Anti-Bribery Laws in India

DELHI SPECIAL POLICE ESTABLISHMENT ACT, 1946

The Central Bureau of Investigation traces its origin to the Special Police Establishment (SPE) which
was set up in 1941 by the Government of India. The preamble of the Act provides that it is an Act to
make provision for the constitution of a special police force 2 in Delhi for the investigation of certain
offences in the Union territories for the superintendence and administration of the said force and
for the extension to other areas of the powers and jurisdiction of members of the said force in regard
to the investigation of the said offences.

The functions of the SPE then were to investigate cases of bribery and corruption in transactions
with the War & Supply Deptt. of India during World War II. Even after the end of the War, the need
for a Central Government agency to investigate cases of bribery and corruption by Central
Government employees was felt. The Delhi Special Police Establishment Act was therefore brought
into force in 1946. The CBI’s power to investigate cases is derived from this Act.

UNLAWFUL ACTIVITIES (PREVENTION) ACT, 1967

The Central Government’s enactment was provided with the short title as ‘the Unlawful Activities
(Prevention) Act, 1967’ to make provisions as to more effective prevention of Individual’s and
associations’ certain unlawful activities. The Act was amended by the Unlawful Activities
(Prevention) Amendment Act, 2004 and also the Amending Act of 2008 for adding in its long title,
the object of dealing with the Terrorist Activities. The provisions of the Act extended to the whole of
India. So far as the applicability of the provisions of the Act to persons are concerned, the section 1
itself says that all persons who commits any act or omission which is contrary to the provisions of
this Act, should be held guilty in India, and be punished under this Act. Even commission of such acts
or omission contrary to the provisions of this Act out side India, is also to be treated, as the same has
been committed in India. The Act makes its provisions under different seven chapters:

 The first chapter is making preliminary provisions of the Act, including short title, extension,
etc.
 The second chapter makes provisions as to unlawful associations.
 The next chapter of the Act makes penal provisions.
 The fourth chapter of the Act makes provisions for penal provisions as to terrorist activities.
 The fifth chapter of the Act deals with the forfeiture of proceeds of terrorism or any property
intended to be used for terrorism.
 The sixth chapter of the Act makes provisions as to terrorist organization, where the
Organisations which are identified as a terrorist one, in the Resolution adopted by the
Security Council of UN, should be added to the Schedule of this Act by the Central
Government. Similarly, removal of any organisation can also be made by the Central
Government under this Act.

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  The seventh chapter of the Act makes miscellaneous provisions, wherein the Central
Government is empowered to direct delegation of powers to the State Government and such
State Government can also with the prior approval from the Centre, direct the delegation of
those powers to any person subordinate to it.

FOREIGN CORRUPT PRACTICES ACT, 1977 (THE FCPA)

APPLICABILITY:  The FCPA applies to any person who has a certain degree of
connection to the United States and engages in foreign corrupt
practices.
 The Act also applies to any act by U.S. businesses, foreign
corporations trading securities in the U.S., American nationals,
citizens, and residents acting in furtherance of a foreign corrupt
practice whether or not they are physically present in the U.S.
OBJECTIVES:  This act was passed to make it unlawful for certain classes of persons
and entities to make payments to foreign government officials to
assist in obtaining or retaining business . Further, the Act governs
not only payments to foreign officials, candidates, and parties, but
any other recipient if part of the bribe is ultimately attributable to a
foreign official, candidate, or party. These payments are not
restricted to monetary forms and may include anything of value.
This is considered the territoriality principle of the act.

PREVENTION OF CORRUPTION ACT, 1988 (THE PCA)

The PCA criminalises the acceptance of gratification (pecuniary or otherwise) other than the
acceptance of legal remuneration by public servants which is paid by their employers in connection
with the performance of their duties. Aiding and abetting the commission of bribery is also an
offence, such that any person, who bribes or attempts to bribe a public servant or acts as a
middleman for such bribing may also be held liable. It extends to the whole of India except the State
of Jammu and Kashmirand it applies also to all citizens of India outside India. The PCA is primarily
directed at public servants, which is broadly defined to include any person who is:

 In the service or pay of the Government, local authority, Government corporation.

 Related to the administration of justice.
 Empowered to conduct elections.
 Appointed to perform public duty.
 An office bearer of Government aided cooperative society.
 An employee of any service commission.
 A member of any university.

Persons authorised to investigate: Notwithstanding anything contained in the Code of Criminal

Procedure, 1973 (2 of 1974), no police officer below the rank,
 in the case of the Delhi Special Police Establishment, of an Inspector of Police;
 in the metropolitan areas of Bombay, Calcutta, Madras and Ahmedabad and in any other
metropolitan area notified as such under sub-section (1) of section 8 of the Code of Criminal
Procedure, 1973 (2 of 1974), of an Assistant Commissioner of Police;

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  elsewhere, of a Deputy Superintendent of Police or a police officer of equivalent rank, shall
investigate any offence punishable under this Act without the order of a Metropolitan
Magistrate or a Magistrate of the first class, as the case may be, or make any arrest therefor
without a warrant: Provided that if a police officer not below the rank of an Inspector of
Police is authorised by the State Government in this behalf by general or special order, he
may also investigate any such offence without the order of a Metropolitan Magistrate or a
Magistrate of the first class, as the case may be, or make arrest therefor without a warrant:
Provided further that an offence referred to in clause (e) of sub-section (1) of section 13 shall
not be investigated without the order of a police officer not below the rank of a
Superintendent of Police.

Liability of individual directors and officers: The PCA does not specifically impose liability on
directors and officers of a corporate entity for the company’s commission of an offence of
corruption. However, as indicated above, the abetment of bribery of public servants is also an
offence. The Companies Act, 2013 enshrines the concept of an ‘officer in default’ who shall be liable
for the acts of the company. An officer in default is specifically held to be liable in cases where such
officer is aware of the contravention of the provisions of the legislation by virtue of receipt of any
proceedings or any participation without objecting to the same. That said, if such officer is able to
establish that he or she acted honestly and reasonably, he or she may be exonerated in certain
circumstances.

CENTRAL VIGILANCE COMMISSION ACT, 2003

OBJECTIVE: It is an Act to provide for the constitution of a Central Vigilance Commission
to inquire or cause inquiries to be conducted into offences alleged to have
been committed under the Prevention of Corruption Act, 1988 by certain
categories of public servants of the Central Government, corporations
established by or under any Central Act, Government companies, societies
and local authorities owned or controlled by the Central Government and
for matters connected therewith or incidental thereto.
COMPOSITION: The CVC shall comprise of the Central Vigilance Commissioner acting as the
Chairman, maximum two Vigilance Commissioners to be the members,
members from the All India Services or Civil Service having special knowledge
in the field of vigilance, policy framing and general administration including
administration of police service. The President shall appoint the Chairman
and the Vigilance Commissioners by warrant under his seal and hand, but
according to the advice of the Committee. The term of office of the
Commissioner shall be four years or until he attains the age of 65 years
whichever is earlier. The Commissioner and other members shall be
removed from his office by an order of the President if proved misbehavior
or incapacity by the Supreme Court. The President shall also remove the
Chairman and members on any of the following grounds:
 Declared insolvent.
 Condemned to be an offender which involves moral turpitude.
 Engaged in any employment for which he receives remuneration
other than his official duties.
 Acquired financial interest which affects his function detrimental

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 to the duties as the Central Vigilance Commissioner or other
members.
FUNCTION: 1. The Commission shall supervise the functions of the Delhi Special
Police Establishment in connection with the investigation and
analysis of offence that comes under the Prevention of Corruption
Act of 1988.
2. It issues directions and orders to the Delhi Special Police
Establishment to discharge the functions assigned to it according to
Delhi Special Police Establishment Act, 1946.
3. The Commission shall also inquire and review the developments of
the complaints received against any officer for committing an
offence under the Prevention of Corruption Act.
4. The Act empowers the Commission to provide guidance to the
Central government or the corporations, Government companies or
any local bodies on the subjects submitted to it.

LOKPAL AND LOKAYUKTA ACT, 2013 (THE LLA)

FORMATION: The Parliament of India also enacted the LLA to constitute a Lokpal for the
Union and Lokayukta for States to inquire into allegations of corruption
against certain public functionaries. The LLA requires each State to establish
a Lokayukta by law under the state legislature.

JURISDICTION: The Lokpal has the jurisdiction to inquire into all complaints arising from the
PCA against certain public functionaries, including an incumbent or past
Prime Minister, an incumbent or past Union Minister and any person who
is or has been a member of Parliament.
COMPOSITION: It consists of one Chairperson and a maximum of 8 members.
Eligibility for chairman and members:

 Former Chief Justice of India, a former member of Supreme Court.

 He should have adequate knowledge and 25 years of experience in
the matters of the anticorruption policy, finance, vigilance, law and
management, and public administration.
 Out of 8 permissible members, half will be coming from the
judiciary. Rest 50% of members will be from OBC/ SC/ST/women
and minorities Judicial members should either be a former Judge of
Supreme Court or a former Chief Justice of a High Court. In the case
of non-judicial members, they should be eminent persons with
impeccable integrity and outstanding ability in their chosen
professional areas. They should have at least of 25 years of
experience in matters relating to anti-corruption policy, vigilance,
public administration, vigilance, law, management, and finance.
LOKPAL WINGS: According to the Lokpal and Lokayukta Act 2013, the anti-corruption
ombudsman would constitute an inquiry wing under the Director of
Enquiry. This wing would conduct the preliminary inquiry into an alleged

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 offense committed by a public servant.
LOKPAL BENCHES: The Chairperson constitutes these benches as per his discretion. Ideally,
each Lokpal bench will have two or more members. About 50% of the
members in each Lokpal Bench should be judicial members. If the bench
has the Chairperson, he will oversee it. In cases of benches that don’t have
the Chairperson, the judicial member will preside over them. The sitting of
these benches may take place in New Delhi or any other place as decided by
the Lokpal.
WORKING OF When citizens air their complaints, Lokpal receives them. Then, the anti-
LOKPAL: corruption ombudsman analyzes them to check their veracity. Once it
decides to go ahead, Lokpal would order a preliminary inquiry. This would be
done either by the inquiry wing or any other Central Government agency,
such as Delhi Special Police Establishment, Central Bureau of Investigation
(CBI), etc. The preliminary inquiry has to get completed within 90 days of
receiving the complaint. However, the time of inquiry can be extended for
further 90 days if the enquiring official requests in writing with sufficient
reasons for it.
POWERS OF LOKPAL: Its inquiry wing has the power to search and seize objects – both movable
and immovable objects – and make reports based on them. These reports
would be taken up by the 3-member Lokpal benches for further scrutiny.
The benches would give the opportunities for the allegedly corrupt officers
to say in their defense. After this, the benches would undertake any of the
following alternatives.

1. If the officers are found guilty, the benches would grant their sanction to
the prosecution wing or CBI to file charge sheets against them. The benches
can also direct the concerned government departments to start proceedings
against them.
2. If the officers are found innocent, the benches would direct the filing of
the closure of case reports.

ICSI ANTI BRIBERY CODE

OBJECTIVES: To ensure that neither the company nor any of its employees, directors or
authorised representatives indulge in bribery in any of their actions taken
for and on behalf of the company in the course of economic, financial or
commercial activities of any kind.
SCOPE: The Code shall be applicable to the company and its:
 Board of Directors,
 Employees (full time or part-time or employed through any third
party contract),
 Agents, Associates, Consultants, Advisors, Representatives and
Intermediaries, and
 Contractors, Sub-contractors and Suppliers of goods and/or
services.

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Bribery ‘Bribery’ includes giving or receiving bribe and third party gratification. The
act of giving bribe is when committed intentionally in the course of
economic, financial or commercial activities and when it is established that
there is a promise, offering or giving, directly or indirectly, of an undue
advantage to any person who directs or works, in any capacity, for a
commercial entity, for the person himself or for another person, in order
that he in breach of his duties, act or refrain from acting.
‘Facilitation ‘Facilitation payment’ means a payment made to government or private
payment’ official that acts as an incentive for the official to complete some action or
process expeditiously to the benefit of the party making the payment.
‘Foreign public ‘Foreign public official’ means any person holding a legislative, executive,
official’ administrative or judicial office of a foreign country, whether appointed or
elected, whether permanent or temporary, whether paid or unpaid and
includes a person who performs a public function or provides service for a
foreign country
CLAUSES: Clause 1: Adherence to Anti-Corruption Laws .
Clause 2: Bribery in Private Sector
Clause 3: Facilitation Payments.
Clause 4: Bribery to Foreign Public Officials
Clause 5: Policy for Gifts, Hospitality & Expenses.
Clause 6: Whistle Blower Mechanism.
Clause 7: Anti- Bribery Training and Awareness Programmes.
Clause 8: Monitoring Mechanism for Anti-Bribery Code .
Clause 9: Sanctions for Non-compliance
Guiding Instructions 1. Corporate Anti-Bribery Code is to be adopted voluntarily.
for Implementation 2. The Code shall be approved by the Board of Directors of the
of the Code: company. Any change in the Code shall be made with the approval
of the Board of the Company.
3. The Code shall be communicated to all existing employees,
management and Board members.
4. All the existing employees, management and Board members shall
confirm in writing that they shall unconditionally follow the Code in
its entirely throughout their employment/association with the
company.
5. All the new appointees shall be required to confirm in writing, at the
time of their induction in the company that they shall be bound by
the Code.
6. All agents, associates, consultants, advisors, all the contractors,
sub-contracts and suppliers of goods and/or services,
representatives and intermediaries engaged by the company shall
also be required to follow the Code while carrying on their
assignments for and on behalf of the company at any time during
their association with the company. It shall also be made a
mandatory condition while confirming their appointment.
7. Anti-Bribery Code of the company shall be put on company’s
website. Any change in the Code shall be immediately updated.

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8. With a view to facilitate the companies, the following model
suggested policies which may be adopted by the Board of Directors
of the company are annexed to the Code:
 Model Policy on Gifts, Hospitality & Expenses.
 Model Policy on Purchase through Supplier and other
Service Provider.
 Guidelines for Whistle Blower Policy.

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 SOME EXAMINATIONQUESTIONS

1. Enumerate the laws and enforcement regimes behind Anti-Corruption and Anti-Bribery Laws in
India.
2. Brief description of the Prevention of Corruption, 1988.
3. What is the composition of the Lokpal?
4. What are the grounds basis which the President can remove the Chairman and members on
the board under Central Vigilance Commission Act, 2003?
5. What is the scope of Anti Bribery code as applicable by the ICSI?
6. Liability of individual directors and officers under Prevention of Corruption Act, 1988.
7. Define the following terms; – Bribery – Facilitation payment – Foreign public official

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